IPO market disarray dims private equity outlook

09.17.2011 - Private Equity

For the first six months of 2011, the IPO market looked to be a bright and shining beacon for private equity firms.  Exits via IPO offerings by private equity portfolio companies continued their upward trend.  Exits via the M&A market also continued to improve although well below the heady days of 2006 and 2007.

According to The Wall Street Journal, DealLogic recently reported that for the first eight months of 2011 there were 87 IPO’s byU.S. companies.  This compares very favorably to 2010 when there were 87 IPO’s for the entire year.  This was a nice respite from conditions in 2008 and 2009 when both the IPO and M&A markets were virtually frozen.  During the dark days of the financial crisis only 22 and then 39 companies were able to go public in 2008 and 2009 respectively according to WilmerHale’s 2011 IPO Report.

However, all good things must come to an end.  And that they did.  Along came August and market volatility increased dramatically.  Four days in a row, the Dow Jones Industrial Average fell or rose by some 400 points which in all likelihood set a record.  Almost overnight the IPO window slammed shut as companies were forced to pull their IPO’s because of the uncertainty that was rampant in the market.

It will no doubt be “wait and see” for the remainder of 2011 as financial markets abhor the uncertainty that is abundant today.  According to The Wall Street Journal, DealLogic reported that the pipeline of companies registered with the SEC to go public swelled to 115 at the end of August.  The market turmoil in August caused 15 companies to pull their offering, the most since April of 2001 when 20 were pulled.

Unfortunately, the market volatility that has plagued the market since early August is unlikely to abate anytime soon and will likely to keep the window closed.  Underwriters are very wary of launching an IPO into tumultuous markets when a stock can often sink after its debut. They are well aware that a majority of the IPO’s issued during the first half of 2011 are now trading below their issue price.

In the last several years, private equity firms have been forced to hold onto their portfolio companies longer, a consequence of the weak recovery from the recession coupled with less than robust M&A and IPO markets.  According to PitchBook’s Private Equity Breakdown report, there were over 6,000 portfolio companies at the end of June.

Without healthy M&A and IPO markets, private equity firms are unable to provide the returns they have promised their limited partners.  And without healthy returns, limited partners are likely to look askance at the asset class.

Recently Completed Private Equity Transactions

ABRY Partners acquired Masergy Communications which provides managed, secure virtualized network services to enterprises with complex needs across multiple locations.

Brynwood Partners has acquired Pearson Candy Company which manufactures and markets confectionery such as Pearson’s Salted Nut Roll, Pearson’s Mint Patties, Pearson’s Nut Goodies and Pearson’s Bun.

Clearview Capital has acquired Child Health Holdings from Harbert Private Equity, the firm announced. Tampa-based Child Health, which does business as Pediatric Health Choice, provides health care services for medically complex, technology-dependent and behaviorally challenged children.

CounterPoint Capital Partners has acquired Tomich Brothers Fish Company which processes wetfish and other seafood for distribution and Standard Seafood a seafood wholesaler and processor.

Energy Capital Partners acquired CoaLogix which provides clean coal technology and services for coal-fired electric utility power plants.

Frontenac Company recapitalized Wenner Bread Products a wholesale bakery that makes frozen, par-baked and fully-baked dough, breads and rolls.

GTCR has completed its acquisition of BankServ which provides software-as-a-service banking and payments systems.

Golden Gate Capital acquired EP Minerals, a producer of diatomaceous earth and perlite filter aids, functional additives and absorbents.

Graham Partners has purchased Chelsea Building Products, a manufacturer of vinyl lineals and accessories for the window and door fabrication market.Chelsea also provides specialty cellular PVC moldings and exterior wall cladding.

H.I.G. Capital acquired Next Generation Vending and Food Service which provides vending and refreshment solutions for corporate and institutional environments.

J.H. Whitney acquired Autospliced which provides electronic interconnect solutions that include connectors, precision metal pins and stampings, integrated connector modules, shape memory alloy assemblies and printed circuit board assemblies.

JMH Capital has acquired Tri-Star Protector which services upstream oil and gas companies through the collection, refurbishment and resale of pipe thread protectors.

Mangrove Equity Partners has acquired North American Aircraft Services which provides aerospace services with a focus on fuel tank maintenance and repair.

MidCap Equity Partners acquired National Educational Music which sells and rents out band and orchestra musical instruments, primarily for use in educational programs.

Revolution Capital Group has acquired a majority stake in the Capital Exchange which provides a networking website for professionals throughout the financial community.

Saturday Capital acquired Code Red which provides first aid and automated external defibrillator training to companies.

The Riverside Company has acquired Sunless, which manufactures spray tanning booths, airbrush equipment and other products for salons.

The Sterling Group has acquired Stackpole International which manufactures and supplies oil pumps and powdered metal components to automotive original equipment manufacturers.

Transom Capital Group has acquired Ritz Camera & Image, a specialty retailer of camera and imaging products and services.

Veronis Suhler Stevenson has acquired Strata Decision Technology which provides web-based financial analytics and performance management software tools used primarily by hospitals and healthcare systems.