The end of 2009 and the beginning of 2010 saw a modest resurgence in initial public offerings (IPOs) of private equity-backed companies. Despite the improving market outlook since the financial crisis, launching an IPO continues to be fraught with uncertainty. However, the need for private equity funds to offload portfolio companies and reduce debt levels means we are likely to continue to see other private equity-backed companies exploring this route throughout the remainder of 2010.

This article examines recent IPOs of private equity-owned companies in the US and Europe and the trends they reveal. The deals examined include:

Extreme market volatility and lack of investor appetite during the financial crisis adversely impacted on the ability of private equity houses to exit their portfolio companies through a stock market flotation. According to Dealogic, the total market capitalisation of private equity-backed company IPOs between 2007 and 2009 was:

Data compiled by Ernst & Young (E&Y) shows that, in 2009, private equity houses completed 461 exit transactions worth US$80.9 billion (about EUR64 billion) worldwide; a decline in relation to 2008, which saw 668 exits worth US$150.7 billion (about EUR119.7 billion) (see Ernst & Young, 2010 global private equity watch: New horizons emerge) (E&Y report).

In terms of specific exit methods:

For an overview of the main exit routes favoured by private equity houses, see Practice Note, Private equity exit routes.

As the E&Y report highlights, these figures are subject to slight regional variations. While IPO exits are more common in the US and, increasingly, Asia, trade sales are more regularly seen in Europe. Secondary buyouts are also more frequent in Europe, where there was a surge of such deals in early 2010.

For an overview of recent private equity buyouts in Europe and the US, see Article, Private equity buyouts after the crisis.

Improved access to the equity markets in the fourth quarter of 2009 (Q4 2009) accounted for a large part of last year's modest IPO recovery and encouraged private equity houses to line up a number of portfolio companies for a flotation; although this process was commonly pursued in parallel with a competitive auction sale (known as a dual-track).

As a result of developments in Q4 2009, commentators predicted that private equity-owned company flotations would dominate the 2010 IPO landscape. For example, in September 2009, Standard & Poor’s, the rating agency, identified 19 European private equity-sponsored companies that could go public during 2010 (see Standard & Poor’s, IPO Candidates queue up as sponsors seek exit route).

Global IPO activity has increased in early 2010 compared to 2009. According to Renaissance Capital, the research firm, the first quarter of 2010 (Q1 2010) was the second busiest since late 2007, and saw more than 100 flotations with a total market capitalisation of US$45 billion (about EUR34 billion) (see Renaissance Capital, Global IPO Review:1st Quarter 2010)

Although IPOs of private equity-backed companies increased during Q1 2010, there were fewer transactions than initially predicted. Despite various success stories, several announced flotations were cancelled or postponed as a result of market volatility, lack of investor appetite or, in some cases, a more attractive offer from an auction bidder. Additionally, many IPOs priced at the bottom of or below their target range partly as a result of disagreements between investors and issuers over valuations.

The fate of private equity IPO exits in early 2010 also varied depending on the jurisdiction of the offering. For instance:

Activity in the US equity markets during Q4 2009 reinforced predictions of a looming rise in portfolio company IPOs. Several high-profile transactions took place during this period, including Dollar General Corporation's US$716 million (about EUR539.8 million) IPO, the largest US retail stock market listing in a decade (see PLC What's Market US, Dollar General Corporation IPO).

In fact, private equity-backed companies accounted for all NYSE IPOs in December 2009. These included the following:

Data by Renaissance Capital suggests that the volume of private equity-backed IPOs continued to increase in early 2010. As at 26 April 2010:

According to Bill Whelan a capital markets partner at Cravath Swaine & Moore LLP in New York, the fact that the sub-prime crisis, subsequent recession and eventual recovery affected the US before Europe partly explains why the volume of private equity-backed IPOs in recent months has been noticeably higher in the US than in the UK and other European jurisdictions. As Whelan explains, "Although the recession did not officially begin until late 2008, from a market perspective, private equity transactions, be it IPOs or leveraged buyouts (LBOs), began declining dramatically in the US before they did elsewhere. Likewise, when US companies filed their audited reports for the 2008 financial year in the spring of 2009, it looked as if, in spite of ongoing difficulties, there were no further looming Lehman Brothers-type collapses. At that point, we started seeing issuers and investors gearing up for IPOs after nearly 18 months of severely reduced activity; there was a lot of pent-up demand."

Whelan also notes that, although the Greek crisis and similar debt-related woes in other Eurozone jurisdictions are affecting markets worldwide, their impact in European bourses has so far been greater than in the US.

Commentators predicted high volumes of UK IPO activity during 2010. Indeed, the majority of private equity portfolio companies in the S&P report (see above) were expected to list their shares on the Main Market of the LSE.

As it turned out, several private equity-backed companies which joined the "flotation gold rush" in late 2009 and early 2010 met a tepid reaction from investors, especially during February 2010 when several IPOs, including those of Travelport and New Look, were cancelled or postponed (see box: Challenges facing private equity-owned IPO candidates).

According to Jonathan Baird, a partner in Freshfields Bruckhaus Deringer LLP's London office, at the beginning of 2010, there were hopes that Gartmore's IPO (see below) along with Delta-Lloyd's listing on Euronext Amsterdam, would re-open the European public markets for private equity-sponsored companies. "However, based on the outcome of some subsequently announced offerings, it looks as if Gartmore may have caught a window of opportunity rather than opening the floodgates," says Baird.

The financial crisis had a strong impact on the Spanish IPO market. Iberdrola Renovables's US$6 billion (about EUR4.8 billion) IPO in December 2007 was followed by a drought in new listings. Amadeus's landmark flotation on 29 April 2010, the largest European IPO of the year so far, ended this long hiatus in Spanish equity capital markets activity.

Although forecasts regarding levels of private equity-backed IPO activity for the rest of 2010 vary from jurisdiction to jurisdiction, it is likely that private equity houses will continue to look to the public markets as a means of deleveraging their portfolio companies or exiting their investments as the year progresses.

Speaking about the US, Whelan notes that, "A lot of sponsors are looking ahead to two or three years from now and seeing a substantial amount of indebtedness coming due. They therefore need ways to deleverage their portfolio companies. The high yield market, which was very strong until recently, is one option, but floating your company on the stock market has the obvious benefit of allowing the sponsor to subsequently sell off his position (partially or completely) as well as reducing debt." Whelan expects several companies to go forward with a flotation as long as the markets remain stable.

Baird believes that, although activity in the UK has not been as buoyant as initially predicted, there are opportunities for quality companies at the right price. "It is not like it was 18 months ago, when people thought the market was shut. Having said that, investors appear to be selective and it is hard to say with certainty that every deal will get done in the time available, especially given that private equity investors looking to exit and/or refinance their portfolio companies usually operate with limited time horizons."

Núñez sees a number of deals in the pipeline in Spain. Some transactions have been put on hold over the past few weeks but there are also several new projects. "However, it is going to be a difficult year in light of Spain's debt difficulties. I hope that the new European financial package to support Eurozone countries and the European deficit adjustment measures prove to be enough to restore confidence and stability. In addition, hopefully investors will acknowledge that many IBEX companies have a global, as opposed to a purely local Spanish presence, which will make them more resilient to Spain's sovereign debt woes." He also notes that activity in the Mercado Alternativo Bursatil, the Spanish equivalent of AIM, is really beginning to take off.