Apollo takes step forward with IPO, two steps back

But there were others that underpinned Apollo's optimism. Some pundits asserted that the $6.4 billion overall valuation the IPO would provide was too steep a discount gap to the KKR and Blackstone trading range, but that that would soon close to the advantage of Apollo's punters.

They cited a decided improvement in Apollo's performance for months leading up to the big event, e.g. economic net income - a prime private equity valuation metric - had grown rapidly to $1.4 billion in 2010. This seemed to suggest that the IPO valuation was low, and that $12 billion at a rough reckoning might be more appropriate.

Moreover the timing seemed fortuitous, launching as the industry as a whole was showing sustained evidence of recovery after the global recession. As an example, buyout deal aggregate value had doubled between 2009 and 2010.

As well, right on the cusp of the offering opening, Apollo had raised $565 million in selling 29.8 million shares, 3.6 million more than expected, and they'd done so at the top end of their $17-19 per share trading range.

Flip Flop

But a day later, it was a starkly different story. Apollo's shares had dipped by 2.1% to $18.61 per share by the day's close. And they've since fallen about 5% from the listing top.

More broadly, this is now being read as a failed litmus test as regards other ‘magic circle' private equity houses opting to go the IPO route anytime soon. Though they've offered no comment, The Carlyle Group and Oaktree are two that had been rumored to be considering similar moves.

Not surprisingly, the pundits' tune is changing; they now reckon that the allure of owning a piece of the private equity success story has become somewhat tarnished in today's changed post-crisis market environment, that the model has lost its cachet. They further reckon that henceforth the public stock price of listed PE players will be the key determinant of prospects going forward, not the performance of a particular firm pre-IPO.

On this basis, Blackstone's most recent price is off 1.6% to $18.10, and KKR's has retreated even further, by 3.4% to $16.82, despite both having risen by 28% and 18% respectively so far in 2011. Blackstone's marker, which IPO'd in 2007, is now trading at about 40% under its IPO price of $31 per share.

TPG takes alternative route

Interestingly, on April 1 it was announced that TPG had sold a minority stake guesstimated at 4.5% to two SWFs, the Kuwait Invest Authority (KIA) and Singapore's GIC. TPG plans to use the proceeds to fund new and present business, and in particular forays into emerging markets. It emphasizes that they won't be used to buy founders' stakes.

The percentages of division between the two SWFs have not been disclosed. But the transaction values TPG at approximately $10 billion. The firm has $48 billion in assets under management.

They are not the first firm to sell a minority stake to a SWF, of course. But there is a precedent that such deals can foretell an IPO somewhere down the road. TPG has said this is not in its plans.

Motivations

Whether that turns out to be true in the long run or not, there is a commonality of motivations in both of these deal types, even though its focal point du jour may shift: that is seeking profits - and fees - beyond buyouts.

This began in the roiling turbulence of the crisis. Banks staggering under sub-prime mortgage securities losses slashed their lending commitments to private equity transactions. A direct result was a 70% slump in buyout deals. And this downside was further complicated by the crisis impact on portfolio companies acquired before it hit at too-high prices, and with too much debt.

Apollo at that time (2008) had rumored problems of this kind, e.g. in its $1.3 billion buyout of Linens ‘n Things, and its $6.6 billion acquisition of real estate brokerage Realogy.

Its recent IPO was actually mooted back then, and then retracted in the face of hostile market sentiment. And an earlier KKR IPO was cancelled for the same reason.

Motives of the moment include lackluster fund raising success despite the apparent market recovery, plus an ultimate need to facilitate sales of founders' stakes in the face of the generational change facing the industry - even though most are at pains to deny this.

So after a couple of boffo years on the stock market, plus the accumulating evidence of a revived credit market restoring buyout prospects, it seemed the time had come to try business as usual.

Maybe, maybe not.

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• Topics
• GPs
• KKR
• The Blackstone Group
• The Carlyle Group
• Oaktree Capital