LONDON - Private equity firms are putting floatation candidates back in the box after receiving knock backs from angry fund managers, and will try again in a couple of years when they hope the market will be more receptive.
High valuations and anti-private equity feeling derailed initial public offering (IPO) plans for Travelport, New Look and Merlin last week, people close to buyout firms say, despite evidence that private equity floats generally outperform markets.
Fund managers are unhappy their investments will be used to delever private equity companies and feel aggrieved that public markets are seen as buyer of last resort for firms with no other viable exit route.
Some firms, including Medica from BC Partners, cut their prices and altered structure to get to the market, but others are not prepared to compromise on valuations, arguing they are offering high quality businesses at a fair price.
I'm not going to be ripped off by fund managers, said one senior private equity executive who declined to be named.
If fund managers want to flex their muscles, so be it. But ultimately this is a short-term problem and it will blow over, he said.
Smaller, more niche companies such as Supergroup, the maker of t-shirts worn by the likes of David Beckham, and interactive white boards maker Promethean -- 25 percent owned by Apax Partners -- are pushing ahead, hoping they can sell investors a debt-free growth story at the right price.
South Africa thermal coal miner Optimum Coal, 19.7 percent owned by private equity firm AMCIC, also launched its $300 million to $500 million offering this week.
They could succeed, but the large private equity IPOs like Travelport from Blackstone, and New Look from Permira and Apax misjudged investor appetite.
These IPOs are sell-side led but I'm not sure the buy side is quite ready for them, said Mark Dickenson, head of corporate broking at Collins Stewart.
Fund managers appear put out that guidance on price has been ignored and they have had limited access to company management and little time to conduct due diligence, Dickenson said.
Travelport cited poor market conditions for scrapping its planned $1.8 billion listing, but investors said they were put off by a lucrative bonus package for management and fundamental concerns about the company.
The buyout industry has been battered by struggling portfolio companies, a lack of new deals and disgruntled investors unhappy with high fees and poor performance.
Selling investments or making the first step to the exit with an IPO is one way of showing the industry is finding its feet again. It can allow firms to return money to investors and embark on new fundraisings and also help them retain staff through the payment of bonuses.
Private equity has been really squeezed from a variety of angles. Exit is the cork to release a lot of the bad vibes that have been plaguing the industry for the last couple years, said Eli Talmor, chairman of the Coller Private Equity Insititute at the London Business School.
Buyout firms had expected the first half of 2010 to provide a temperate climate to float companies, but they have been disappointed by increased volatility and falls in public markets -- Britain's blue-chip FTSE 100 index is down about 5 percent from January highs.
Academic research comes down in private equity's favor. Private-equity backed IPOs between 1992 and 2004 consistently outperformed markets in the 36 months post float, according to Mario Levis, associate dean at the Cass Business School.
But recent experience, notably that of British department store Debenhams, which has fallen 66 percent since its $1.75 billion listing in 2006, have tarnished the reputation of private equity IPOs.
Of the world's 20 biggest IPOs involving private equity in 2006 and 2007, the peak of the last IPO cycle, only six trade above their offer prices, according to Thomson Reuters data.
Sadly the timing of the first quarter has proved to be very poor, said the senior private equity executive.
Large consumer businesses stand little chance of floating at the moment, but if the outlook improves in 12 months to 24 months time these IPOs could be back, he said.
(Editing by Rupert Winchester)