By Marietta Cauchi
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Private equity firms looking to list companies in an expected rash of IPOs on European exchanges face a number of challenges, not least a wary public that won't be keen to take on companies whose owners have a reputation for piling on debt and asset-stripping.
Europe's IPO market is opening up on the back of recovering equity markets, and encouraging trade players and private equity firms alike to float assets. Buyout firms in particular are keen to return some long-awaited cash to investors by offloading some of their portfolio companies that they have been unable to sell amid falling stock markets and while debt to finance large deals remains unavailable.
There is currently around EUR600 billion worth of value held by private equity firms in European companies, according to recent research from Ernst & Young. IPOs, which have typically accounted for 10%-15% of exits, are a critical exit means for the largest PE-owned businesses, it says.
Other experts agree.
"We are definitely seeing a strong interest from private equity firms wanting to list large companies," said Linda Main, head of U.K. Capital Markets Group at KPMG.
"Secondary buyouts by other private equity companies are still difficult because of the unavailability of debt and a lot of the assets being sold are too large for a trade buyer to digest," she added.
Companies currently being readied for the public markets include German cable company Unitymedia, owned by BC Partners and Apollo Management; and Gartmore, the U.K. fund management firm owned by Hellman & Friedman, both of which are expected to be floated this year. Others such as travel reservations company Amadeus IT Group SA, owned by BC Partners and Cinven Group; Bridgepoint's Pets at Home and Blackstone Group LP's (BX) Merlin Entertainments are all tipped to float early next year.
These companies are all performing well, but their private equity owners still face an uphill battle selling them to the public, say experts.
Good trading figures to support the price the private equity company wants are essential - and not just on a current basis - the company must have had good results for at least three years, said Richard Weaver, partner in PricewaterhouseCoopers' Capital Markets Group.
But aside from this, the seller must be able to show that future performance isn't going to be derailed by large amounts of debt, he added.
"Gearing is a major issue - companies have had to deal with massive amounts of debt and have done this by relying on heavily discounted rights issues, which have diluted shares - investors buying shares in a new company don't want to risk dilution in future rights issues," he said.
Investors will be more cautious about buying from private equity owners than they would be from corporates because of the reputational damage suffered by the industry over the past few years, he adds.
Private equity firms typically buy companies using cash and a large slug of debt - the more leverage the better the return on their cash when they come to sell the asset. When debt was easy to come by, many buyout firms made a habit of refinancing companies just shortly after acquisition, piling on yet more debt to pay themselves large dividends.
For example TPG, which earlier this week sold its remaining stake in Debenhams PLC (DEB.LN), carried out a GBP2 billion refinancing at the retailer in 2005 together with other owners CVC Capital Partners and Merrill Lynch Private Equity, just two years after the consortium had paid GBP1.77 billion for the company, using just GBP600 million cash with the rest in debt.
The recapitalization paid for a handsome GBP800 million dividend for the buyout companies and the following year the company was floated for GBP1.68 billion - after which shares declined steadily and only started to recover this year.
Unsurprisingly, investors were none too pleased to see buyout firms make handsome profits while shares in the company continued to fall and many remain skeptical of buying companies owned by private equity firms.
"Private equity has some cracking businesses but the industry's own story could taint sales to the public," said Weaver.
"There is pent-up supply but whether this is matched by pent-up demand remains to be seen - there are still scars from previous buyout exits," he added.
-By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; marietta.cauchi@dowjones.com