Deals May Strain On Refco News;

Buy-out firms back a growing number of IPOs

Fri May 26, 2006 5:49 PM ET

By Justin Grant

NEW YORK, May 26 (Reuters) - The steady flow of U.S. IPOs coming from the cash-rich world of private equity is expected to continue into 2007, according to new research, a trend analysts say is driven by a relatively healthy market and the fact that buy-out firms are raising more money.

According to data tracker Dealogic, 26 companies have filed for sponsor-backed initial public offerings in the last six months, in deals that could fetch up to $4.9 billion.

"A lot of companies get talked out of doing IPOs on their own by these private equity firms, who are very experienced in taking companies public," said Francis Gaskins, president of independent research firm IPO Desktop.

"They do it at a relatively high level," he added. "The market has been more receptive to it."

Last year private equity-backed deals made up a bigger share of all deals than in any year since 1980, according to data provided by University of Florida finance professor Jay Ritter, who specializes in IPOs.

More than 40 percent of all IPOs had private equity sponsors in 2005, and that share should keep growing as long as buy-out firms continue to raise large sums of money, Ritter said.

The first quarter was a strong one for buy-out firms, with 93 funds raising $31.4 billion, according to Thomson Financial.

Bain Capital, which bought a slice of recently listed Burger King Holdings Inc. (BKC.N: Quote, Profile, Research) in 2002, accounted for a quarter of the fundraising, raising about $8 billion.

Although private equity-backed IPOs have brought in a below-average first-day return of 8.9 percent over the last year, the stocks have slightly outperformed the broader market on a long-term basis.

In the last 12 months, 93 private equity-backed deals have averaged a gain of 29.5 percent since coming to market, according to Dealogic. That compares with 269 other IPOs in the same period, which are averaging a 24.8 percent gain since their market debuts.

"Private equity deals have, on average, been fairly priced," Ritter said. "In general, investors haven't been overly optimistic about these mature companies, and the valuations have been in line with other comparable firms."

ACCOMPANYING DEBT

Investors buying into private equity-backed IPOs are often betting on a company carrying a lot of debt.

Highly leveraged Burger King said on Friday it paid off $350 million, or 25 percent of its debt, after going public on May 18.

The Miami-based company said it planned to use the proceeds from its $425 million stock sale to repay debt stemming from a $367 million special dividend paid to its investors -- mostly private equity firms Texas Pacific Group [TPG.UL], Bain Capital and a Goldman Sachs (GS.N: Quote, Profile, Research) affiliate.

Private equity firms buy companies or controlling stakes in them, restructure their business and sell them for a premium, usually within three to five years. They pay for deals with a small wad of cash and use debt to finance the difference. The buy-out firms keep a share of the profit they make, and often sell the rest of the equity to investors though IPOs.

Tom Taulli, an IPO analyst and author of "Investing in IPOs," warned that the private equity approach to investing required cooperation from the market and interest rates, in particular.

"Why would someone go into all that debt?" Taulli said. "When the economy is strong, this is when you can really make money."

"At some point, when the economy softens and the debt goes higher, that's when the opposite happens. Leverage can be the best thing in the world and it can be the worst thing in the world."