In the IPO world, it seems to be the year of private equity. Many of the top-performing companies that hit the market have been “boomerangs,” meaning they were part of going-private transactions previously.
Just take a look at this sample:
|Bright Horizons Family Solutions||BFAM||50.2%|
|Boise Cascade Co.||BCC||25%|
Of course, the trend should be no surprise. From 2000 to 2007, there was a huge burst of going-private transactions, led by firms like KKR (KKR), Blackstone Group (BX), Apollo Global Management (APO) and Carlyle Group (CG).
But for those firms to actually make money, they need to either take their portfolio companies public or sell them. This has another interesting name: harvesting.
With the equities markets in bull mode, the preferred option has been IPOs. After all, the average return of an IPO for 2013 is 20%, while the gain has been a sizzling 29% for those companies with market caps over $1 billion.
The wave has been about more than just a strong market, though. For the most part, private equity firms have become more operational with their portfolio companies. In fact, they didn’t really have a choice. With the financial crisis in 2008, there was an urgent need to restructure many companies, which often meant greatly reducing the cost structures.
Plus, another benefit has been rock-bottom interest rates. Private equity firms have been able to refinance their existing debt, which has meant even lower costs.
Toss in the uptick in the economy — which translates to growth on the top-line as well — and it should be no surprise that private equity-backed deals are hot.
Still, investors should be a bit wary. When top dealmakers are eager to unload assets, some skepticism is warranted. For example, Apollo’s CEO Leon Black recently said:
“We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down. And if we’re not selling, we’re refinancing.”
That’s hardly something you want to hear … especially when you’re the buyer of IPOs.
But investors will reach a breaking point eventually … and maybe pretty soon. Just a few concerns include rising interest rates, volatility in the equities markets and continued weakness in Europe and even China.
The bottom line is that IPOs are a risky game, and booms generally do not last long. So if you see a private equity deal, you still need to do your homework. Things may start to get tougher quickly.