Now that demand for initial public offerings has revived, many private equity firms, eager to drum up profits after two years of pain and woe, are hustling some of their stronger holdings to market (see related story, page 36). Since early August, at least seven companies with private equity backing have been IPO'd in the U.S. and Canada, and a host of others are in the pipeline.
On one level, the IPO surge has performed as hoped: In all seven, the buyout sponsors have posted partly realized gains on investment, ranging from 28% in the case of RailAmerica Inc., majority owned by Fortress Investment Group LLC, to 2,200% for Talecris Biotherapeutics Inc., controlled by Cerberus Capital Management LP and Ampersand Ventures.
Even so, the market's reception has been mixed.
The latest to go public, RailAmerica, had a shaky debut. After pricing on Oct. 12 at $15 per share, below its expected range of $16 to $18, the stock closed at $13.75 in its debut session on the New York Stock Exchange. Despite the bump-up of the issue's size from 21 million to 22 million shares, the IPO raised $330 million or about $27 million less than planned.
The lackluster performance doesn't necessarily bode ill for subsequent IPOs of PE-backed companies, observers say. "Investors look at these on a case-by-case basis," says Nick Einhorn, a research analyst at Renaissance Capital LLC in Greenwich, Conn. "A lot of these companies were bought when the market was higher than it is now. The private equity guys are trying to make a profit, but it's a very tricky balancing act" between the returns that the PE firms seek, he adds, "and what investors are willing to pay."
That clearly was RailAmerica's problem: The midpoint of that issue's expected price range, $17, would have valued the business at 12 times trailing Ebitda, well above what most other railroads sell for.
Even at $13.75 a share, the stock was fully valued, at 9.8 times.
Four days earlier, by contrast, a Canadian discount retailer owned by Boston's Bain Capital LLC, enjoyed a rip-roaring debut on the Toronto Stock Exchange. Dollarama Inc.'s IPO priced at C$17.50 ($17.01) a share, near the high end of the expected price range of C$16 to C$18, and the shares climbed to C$19.33 in late-afternoon trading.
Though that price was 11.9 times Ebitda, Dollarama's shares have continued to trade above C$19. For Bain, the IPO yielded a 200% partly realized gain on the firm's C$374 million, five-year-old equity investment.
Dollarama's showing augured well for Dollar General Corp., another discount retailer that seems to be close to going public in the U.S. New York private equity firm Kohlberg Kravis Roberts & Co. paid some $7.2 billion for the chain in July 2007. Dollar General hasn't yet announced a price range.
But given the many similarities between Dollar General and Dollarama, and the muscular financial performance of the KKR portfolio company, the PE firm doubtless has high hopes for the public offering.
In fact, the majority of PE-related IPOs since early August have outperformed the overall market. Two standouts are Talecris, which as of Oct. 14 sold for $21.25 per share, 11.8% above its IPO price of $19, and Education Management Corp., backed by Providence Equity Partners LLC, Goldman Sachs Capital Partners and Leeds Equity Partners LLC, whose stock has soared 25.5%.
Also up more than 7.5% since debuting in August are shares of Emdeon Inc., a healthcare business backed by General Atlantic LLC and Hellman & Friedman LLC, and those of Avago Technologies Ltd., a Singapore-based chipmaker majority owned by KKR and Silver Lake.
Besides RailAmerica, the only laggard has been Select Medical Holdings Corp., a hospital operator controlled by Welsh, Carson, Anderson & Stowe and Thoma Cressey Bravo Inc., which went public Sept. 25.
Select's shares trade at $9.75, 25 cents below the IPO price.
In addition to Dollar General, private equity-backed companies preparing to go public include AGA Medical Holdings Inc. (Welsh Carson), Team Health (Blackstone Group LP), Birds Eye Foods Inc. (Vestar Capital Partners Inc.) and VS Holdings Inc. (Irving Place Capital Management LP).
VS, the parent of vitamin and supplement retailer Vitamin Shoppe Inc., set a price range Oct. 14 of $14 to $16 a share for the 9.1 million share IPO it plans.
At the price range's $15 midpoint, Irving Place, formerly Bear Stearns Merchant Banking, which bought Vitamin Shoppe in November 2002, would score about a 130% gain on its original $12 million investment.