The private equity business is a gateway to profits. Many of the world’s billionaires have made their fortunes this way, such as the operators at KKR (NYSE:KKR), Blackstone Group (NYSE:BX) and Carlyle Group (NASDAQ:CG).
The PE strategy actually is pretty simple (if not difficult in practice): First, a fund borrows large amounts of money to buy a company and take it private. Then, the private equity group forces deep restructurings of the company, which usually includes layoffs. Finally, there will be an “exit,” which tends to be an initial public offering — and where the private equity makes its big lump sum.
Well, with the equities markets in the bull mode, the environment is ideal to snag big returns from IPOs, and the PE game is going along swimmingly.
CDW Looks for an IPO
The latest private equity deal that is at the exit stage is tech goods distributor CDW. Back in 2007 — at the height of the PE buyout boom — the company went private in a $7.3 billion transaction that included sponsors Madison Dearborn Partners and Providence Equity.
Now, according to a report in Reuters, CDW has hired JPMorgan Chase (NYSE:JPM), Barclays (NYSE:BCS) and Goldman Sachs (NYSE:GS) to lead a public offering. The transaction could raise up to $750 million — and it’s a good bet that much of the cash will go into the pockets of the PE sponsors.
CDW’s restructuring efforts — which did in fact include several rounds of layoffs — have paid off. Last year, net sales reached $10.128 billion, up from $9.6 billion in the same period a year ago, and the company’s continued focus on finding efficiencies has led to robust cash flows. Also, adjusted EBITDA came to $766.6 million in 2012, up from $717.3 million in 2011.
Going forward, CDW should benefit from some secular trends, including cloud adoption and increased mobility.
Are Private Equity Deals Good for Investors?
It’s true that some taint comes along with private equity deals. The perception is that debt levels are generally too high and the cost-cutting might be too severe, which could stunt long-term growth. But it’s an overly simplistic view.
The fact is that some PE deals can be great investments. According to a report from Ernst & Young, PE-backed deals in 2012 returned an average of 14.1%. This compared to the overall average return of 9.5%, which excludes the Facebook (NASDAQ:FB) offering.
Here’s a look at some of 2012′s top deals:
So yes, there are definitely opportunities to get nice market-beating returns from PE-backed IPOs. And if the overall market remains in this bull phase, we could see even more of these deals hit the market in 2013.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.