PE-Backed IPOs in 2016 Could Be the Worst in a While

September 5, 2016

If you are involved in the connection between initial public offerings (IPOs) and the private equity business, you know that 2016 has been weak, real weak.

According to the private equity data provider Pitchbook, through the end of August the market has seen 42 private equity-backed IPOs. Is 42 private-equity backed IPOs weak?  Here’s a look at 2016 compared to the number of private equity-backed IPOs in the prior five years.

In 2011, there were 75 private equity-backed IPOs.  That declined slightly in 2012 to 69.  Private equity-backed IPOs jumped in 2013 to 116, followed by 169 in 2014 and then decelerating to 105 in 2015.

By comparison to the past 3 years particularly, the 42 private equity-backed IPOs year-to-date in 2016 does not bode well.  Weak, very weak.

The drop in IPOs valued at $1 billion or more and backed by private equity companies is perhaps even more astonishing.  In 2011 there were 25 such transactions.  The number stayed relatively weak in 2012 at 21.  In 2013, 2014, and 2015 the numbers jumped higher, expanding to 49, 64, and 33, respectively.

PE backed IPOs1 Source: Pitchbook

 

Private Sales are Looking More Attractive in 2016

Where have the deals gone?  Well, part of the answer is that 2016 is simply a relative dry year.  Some of the dryness stems from a weakening global economy and a relatively more risk-averse investor.

Of course, economic conditions only explain part of the so-far sour 2016.  Another movement is that owners and private equity investors are shifting to private sales.  Private sales have been offering some transparent advantages recently, including lowering debt levels and low interest rates.

For example, Thomas H Lee Partners had been considering a mid-August IPO for inVentiv Health, a pharmaceutical research company. With only two weeks before inVentiv Health was to go through with the IPO marketing, Thomas H Lee Partners decided instead to sell half of its stake in the company to Advent International.

Why?  Indications are that although the private sales valuation at $3.8 billion was less than what Thomas H Lee Partners might have gotten through an IPO, inVentiv’s leverage at around the 6x level was just too high for the deal to be done outside of a primary deal.

Because of this, all the proceeds would have gone to pay down debt to get leverage under the 4.5x level now typically needed to get stock investors on board, stopping Thomas H Lee Partners from extracting any cash until several months after the IPO. By selling half the business to Advent, Thomas H Lee Partners was able to immediately return capital to its partners and retain the high leverage in the business.

The purchaser, Advent, had no problem increasing debt commitments to back its equity investment.

Conclusion

Overall, private equity-backed IPOs in 2016 are quite weak.  Among the contributing factors are the weak economy and the relatively increasing attractiveness of private sales over public markets.

Comments on this entry are closed.

Previous post:

Next post:

Real Time Web Analytics