Storm clouds ahead for PE-backed IPOs?June 27, 2013: 5:09 PM ET
The trickle-down business of 'tapering.'
FORTUNE -- Is window for private equity-backed IPOs about to shut?
That's the question many private equity managers must be left with today, after a disappointing performances by CDW Inc. and HD Supply Inc.
These are two companies that share almost nothing in common besides private equity ownership. CDW (CDW) is a profitable, Illinois-based computer reseller that was taken private via a traditional leveraged buyout back. HD Supply is an unprofitable, Atlanta-based construction supply company that was taken private via a carve-out from Home Depot Inc. (HD), with Home Depot retaining a minority ownership stake and strategic relationship.
But both companies came up well short of their IPO intentions, and barely popped in their first day of trading.
CDW raised $395 million after pricing 23.3 million shares at $17 a piece, compared to original plans to offer 27.9 million shares at between $20 and $23 per share. Cut out of the final offering were anticipated share sales by private equity firms Madison Dearborn Partners and Providence Equity Partners. CDW closed the day up just 8.06% to $18.376 per share.
HD Supply raised more money ($957 million) by pricing 53.19 million shares at $18 per share, but that was well below the company's $22-$25 per share offering range. And the company closed up just 3.67% at $18.66 per share.
Neither company broke the $20 mark at any point during the trading day -- a trading day that saw strong performance from both the Dow (up 114 points) and the NASDAQ (up 26 points).
So what happened?
My hypothesis is that investors were spooked by what tapering talk is doing to the bond markets, and how that may affect the ability of PE-backed companies to refinance debt going forward. CDW was carrying nearly 3.7 billion in debt through March 31, while HD Supply was larded with a whopping $6.62 billion. Both companies plan to use some IPO proceeds to pay down those totals, but obviously it will be relatively small bites.
In the past (and by "past" I mean "before June"), public market investors didn't seem to be worrying much about such leveraged loan repayments. Hopefully the companies could meet their obligations but, if not, they could just refinance. After all, there's been no better friend to private equity over the past three years than Ben Bernanke.
Today, however, that recent convention is being challenged. Just ask CDW backer Madison Dearborn, which had to cancel a pair of refinancings earlier this month. Isn't it reasonable that public equity investors are beginning to price in this new-found risk?
There are a lot of companies taken private during the 2005-2008 "Golden Age" that remain in private equity portfolios, for which IPO is the only viable exit option. And perhaps CDW and HD Supply are anomalies. But, if they are the front-end of coming storm-front, then private equity shops will soon regret slow-playing those hands.
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