IPO exit route bumpy for buyout firms

By Megan Davies

NEW YORK (Reuters) - Private equity firms trying to unload companies that they previously acquired -- long a source of hefty returns for the investment vehicles -- are having a tougher time taking them public amid sinking stock market values.

The number and volume of private-equity-backed IPOs has decreased over the past few months amid weaker equity markets. The Standard & Poor's 500 Index .SPX has fallen about 15 percent since mid-October, when fresh worries about the economy and credit markets hit shares.

The upshot is that buyout firms will likely have to hang onto companies they might otherwise be able to float in two years or less longer, until the market becomes less volatile.

"They'll have to hold the companies and hope that they will do well in terms of revenues and profits in difficult times," said Francis Gaskins, president of research firm IPOdesktop.com. "The window will come back, although I don't know (when)."

Buyout firms typically buy companies with a view to selling them or taking them public a few years later. But the credit crunch has hit M&A volume, making it harder to offload companies to buyers and harder to take them public.

The number and size of portfolio companies that private equity firms have taken public in recent months has declined, according to data from both Dealogic and Thomson.

October through January, there were 30 IPOs of companies backed by private equity, raising $5.8 billion in total, Dealogic data showed. For the same period the prior year, there were 38 buyout-backed IPOs raising $8.3 billion.

"The credit markets are key to this as well," said Michael Holland, chairman of private investment firm Holland & Co and a former partner at buyout firm Blackstone Group (BX.N: Quote, Profile, Research).

"If you look at January versus a year ago, I believe you had less than 10 percent of the junk bond issuance. That's key to this market -- the inability to raise any debt precludes a lot of the deal activity from occurring. That is directly affecting in some ways the IPO business, which just isn't there right now."

Gaskins said the companies that do go public have to be able to withstand a tougher economic environment.

"The bar's been considerably raised as a result of this economic climate," he said. "It's a lot higher now, and a lot of people can't get over it."

He noted it is harder to take indebted companies public, as there is an uncertain outlook on when debt can be refinanced or fresh debt raised should a company miss quarterly numbers.

Gaskins noted that two recent private-equity backed IPOs, IPC The Hospitalist Co Inc (IPCM.O: Quote, Profile, Research) and RiskMetrics Group Inc RMG.N, did well because they had revenue growth and didn't need capital investment.

North Hollywood, California-based IPC, which provides in- patient care primarily in hospital settings, is up 30 percent from its IPO pricing at $16 a share. The company was backed by venture capital firm Morgenthaler LLP.

RiskMetrics, backed by a group including Spectrum Equity Investors, has also gained from its IPO price. The company -- owner of Institutional Shareholder Services (ISS), which advises shareholders on how to cast votes -- has seen its shares rise about 29 percent from their $17.50 pricing.

Some companies private equity firms took public in larger IPOs prior to the credit crunch have seen their shares take a hit. Wireless-service provider MetroPCS Communications (PCS.N: Quote, Profile, Research), backed by TA Associates and Madison Dearborn Partners, is down 32 percent from its April 2007 IPO price of $23

Car rental company Hertz Global Holdings Inc (HTZ.N: Quote, Profile, Research), which was backed by Clayton, Dubilier & Rice Inc and Carlyle Group, went public at $15 a share in November 2006 -- just 11 months after the private equity funds bought it -- and hit a high last year around $27. It is now trading at $13.87.

Holland said he couldn't predict how long it would take for markets to recover enough for IPOs to become a more viable exit route.

"The credit markets are still trying to heal from things that have occurred since last August," Holland said. "There have been a series of events that have caused the markets to seize up a couple of times at least. The markets have to continue to heal and it's no ones intelligent guess how long that will take at this point."