PE-Backed Buyouts Dominate Exits as IPOs Languish

Initial public offerings (IPOs) have been a popular mechanism for private equity-backed companies to monetize their investments. The languishing IPO market, however, has led financial sponsors to reconsider their strategies and instead rely on buyouts to exit their portfolio companies.

PE-Backed Buyouts Dominate Exits as IPOs Languish

IPO market drops in 2015

While 2014 saw a record-breaking year for global IPOs, 2015 did not fare as well, according to IPO investment adviser and research company Renaissance Capital. After reaching a seven-year high of $241.5 billion proceeds raised in global IPOs in 2014, the total proceeds raised in 2015 significantly dropped by 35.2% to $156.5 billion. Renaissance attributed this decline to “volatile equity returns.”

In the U.S., Renaissance found that there were only 170 IPOs, raising $30 billion, in 2015, the lowest in six years. This was a significant drop from 2014, in which there were 275 IPOs that generated $85.3 billion in proceeds. Renaissance attributed this decline to several factors, including: “uncertainties about Federal Reserve and European monetary policies, concerns over the Chinese economy, poor IPO performance, declining energy prices and increases in M&A and private market transactions.”

For U.S. PE-sponsored IPOs, the numbers are even more staggering. Renaissance noted that only 39 PE-sponsored companies filed to go public in 2015, compared to 71 that filed in 2014. In terms of deal value, $11.3 billion proceeds were raised by U.S. PE-sponsored companies in their IPOs in 2015, a sharp contrast to the $25 billion raised in 2014.

According to Renaissance, if not for KKR-backed First Data’s IPO, which raised $2.6 billion and was the only leveraged buyout to raise over $1 billion in 2015, “2015 would have been the weakest year for PE-backed IPO exits since the financial crisis.”

Rethinking going public

The volatility of the market led many PE-backed companies to rethink their plans to go public and withdraw or postpone their IPOs last year.

A recent article published by the Deal Pipeline, noted that “more than 20% of the PE-sponsored IPOs got pulled” last year, “the most since 2012, when 34 PE-backed companies decided not to execute their plan to go public.”

Some of those companies included,

  • Parthenon Capital Partners portfolio company loanDepot, which withdrew plans in November 2015, for an expected $510 million offering, citing in a company blog post that the “choppy IPO market” and “recent market conditions” led to its decision;
  • Univision Communications, backed by a consortium of PE-firms such as Madison Dearborn Partners, Providence Equity Partners and TPG Capital Management (TPG), which also cited market conditions in postponing its IPO in December 2015; and
  • Aluminum processor Aleris Corp -- which counts Apollo Global Management as one of its biggest shareholders -- withdrew its plan to list 31.3 million shares at a price range between $15 and $17 in February 2015.

More recently, on March 10, 2016, New Jersey medical technology company Valeritas Inc., which is owned by Welsh Carson Anderson & Stowe, pulled its plans for an expected $90 million IPO. In its Registration Withdrawal Request filed with the Securities and Exchange Commission, the company stated that “market conditions” have forced it to cancel its IPO plans. Valeritas had previously cancelled plans for an IPO in March 2015.

Changing course from IPOs to Buyouts

With the current state of the IPO market, PE sponsors have looked to M&A for exits from their investments. Specifically, sales of the portfolio company to a strategic buyer appear to have been the dominant form for PE exits in 2015 as IPO activity waned.

Ernst & Young’s Private Equity, Public Exits 2015 year-end report stated that “exit routes changed markedly in 2015. IPOs shrunk from nearly a quarter of total PE exit value in 2014, to 14% in 2015. Strategic acquirers meanwhile accounted for an increasing share of overall exit activity.”

Confirming this trend, Private Equity Growth Capital Council (PEGC) noted in its 2015-Q4 Private Equity Trends Report that nine of the 10 largest U.S. PE exits during 2015-Q4 were sales to strategic buyers, including the $11.8 billion sale of Freescale Semiconductor to NXP Semiconductors NV by a consortium made up of Permira Advisers, The Blackstone Group, The Carlyle Group and TPG. According to PEGC, “strategic M&As accounted for 69% of all U.S. private equity exits during 2015, up from 63% in 2014.”

The lagging IPO market has led many PE firms to abandon their IPO plans and pursue a sale to a strategic buyer instead.

TPG, for instance, changed course in taking its generic-drugs maker Par Pharmaceutical Holdings Inc. public through an IPO last year. In March 2015, Par Pharmaceuticals announced that it would launch an IPO, anticipating to raise up to $100 million or more. Par Pharmaceuticals withdrew its registration statement, however, after agreeing to be acquired by Endo International PLC for $8 billion in May. Given that TPG acquired Par Pharmaceuticals for $1.9 billion in 2012, the private equity company made a significant return on its investment through the buyout in only three years.

Likewise, after originally filing for an IPO in June 2015, SunGard Data Systems (backed by a consortium of PE-sellers that included KKR, Providence Equity Partners, Silver Lake, The Blackstone Group, and TPG) agreed in August to be acquired by Fidelity National Information Services (FNIS) for $9.1 billion. SunGard had been pursuing a dual track IPO and sale, but terminated the IPO from which SunGard expected to yield $750 in proceeds, after reaching an agreement with FNIS.

Although sales to strategic buyers have been the primary exit means for PE sellers, they are not the only option for financial sponsors looking to sell off their investments in the IPO downturn. Secondary buyouts have also helped PE sponsors who no longer find an IPO suitable for an exit.

For example, after filing to go public in August 2015, Petco Holdings Inc. withdrew its plans to go public in February 2016, stating that it “has determined not to pursue the initial public offering… due to the acquisition of the Company by PET Acquisition LLC.” Last November, private equity sellers led by TPG and Leonard Green & Partners LP decided to sell the company to funds affiliated with CVC Capital Partners and the Canada Pension Plan Investment Board for about $4.6 billion.

Although IPOs, sales to strategic acquirers and secondary buyouts have been the three primary means for a PE seller to exit their investment, IPOs seem to have become the least financially appealable path to exit. If the 2016 IPO market follows the same path as 2015, we will likely continue to see PE sellers use buyouts, particularly to strategic sellers, as their dominant exit strategy.

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