‘Boomerang’ IPO Boom Could Bust Soon

Nothing lasts forever, especially on Wall Street

   

In the IPO world, it seems to be the year of private equity. Many of the top-performing companies that hit the market have been “boomerangs,” meaning they were part of going-private transactions previously.

Just take a look at this sample:

Company Ticker Return
Pinnacle Foods PF 26.5%
Bright Horizons Family Solutions BFAM 50.2%
SeaWorld Entertainment SEAS 35.7%
Boise Cascade Co. BCC 25%

Of course, the trend should be no surprise. From 2000 to 2007, there was a huge burst of going-private transactions, led by firms like KKR (KKR), Blackstone Group (BX), Apollo Global Management (APO) and Carlyle Group (CG).

But for those firms to actually make money, they need to either take their portfolio companies public or sell them. This has another interesting name: harvesting.

With the equities markets in bull mode, the preferred option has been IPOs. After all, the average return of an IPO for 2013 is 20%, while the gain has been a sizzling 29% for those companies with market caps over $1 billion.

The wave has been about more than just a strong market, though. For the most part, private equity firms have become more operational with their portfolio companies. In fact, they didn’t really have a choice. With the financial crisis in 2008, there was an urgent need to restructure many companies, which often meant greatly reducing the cost structures.

Plus, another benefit has been rock-bottom interest rates. Private equity firms have been able to refinance their existing debt, which has meant even lower costs.

Toss in the uptick in the economy — which translates to growth on the top-line as well — and it should be no surprise that private equity-backed deals are hot.

Still, investors should be a bit wary. When top dealmakers are eager to unload assets, some skepticism is warranted. For example, Apollo’s CEO Leon Black recently said:

“We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down. And if we’re not selling, we’re refinancing.”

That’s hardly something you want to hear … especially when you’re the buyer of IPOs.

Of course, Wall Street never seems to lack enthusiasm and speed for the most part. Thus, there is a healthy pipeline of major private equity deals ready to tap the markets, such as HD Supply and CDW.

But investors will reach a breaking point eventually … and maybe pretty soon. Just a few concerns include rising interest rates, volatility in the equities markets and continued weakness in Europe and even China.

The bottom line is that IPOs are a risky game, and booms generally do not last long. So if you see a private equity deal, you still need to do your homework. Things may start to get tougher quickly.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/ipo-playbook/boomerang-ipo-boom-could-bust-soon/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.