Capital Markets

IPOs: The New Public-private Partnership

Private equity has backed more than a quarter of this year's IPOs.
Alan RappeportJune 22, 2007

The initial public offering of Blackstone Group, the largest private-equity firm yet to go public, has made a splash of a listing this week. But the latest IPO caps a wave of others as offerings in the United States have surged during the last quarter, according to a new study by Ernst and Young.

The final quarter of 2006 saw 72 IPOs worth $12.4 billion, making it the most active quarter in the country since 1999. “Deal sizes are larger than ever, and private equity is backing many of them,” says Maria Pinelli, the Americas Strategic Growth Market Leader at Ernst and Young. The United States led every other country with 187 IPOs in 2006.

Despite the strong finish to 2006 and a busy first quarter of 2007 (39 IPOs worth $6.9 billion), the number of IPOs declined from 2005 to 2006 and is far from that of the bubble days of 2000 when the United States saw 345 offerings worth $58.7 billion, according to Ernst and Young. The worst year for IPOs this decade was 2003, with just 63 new companies listing.

Although Blackstone could spur other private-equity firms to go public, such firms have already played an important role in the resurgence of IPOs. The study reports that private equity was behind 43 percent of all IPO deals for U.S. companies in 2006 and raised 55 percent of their funds. Thus far in 2007, private equity has backed 26 percent of IPO deals and raised 36 percent of their funds.

Meanwhile, a third of the IPO deals in this country were funded by venture-capital firms. Last May was the most active month for venture-backed IPOs since October 2004, according to the National Venture Capital Association, as 11 companies raised $1.6 billion.

Another growing source of newly public firms, as CFO magazine reports in July, is special-purpose acquisition companies (SPACs). According to Dealogic, a capital-markets analysis firm, the 40 SPACs created in 2006 accounted for 16 percent of all going public transactions. This kind of listing entails going public through a merger with an existing “shell,” often allowing young companies to generate more cash and giving investors more flexibility to liquidate if they choose.

SPACs could become even more popular if Congress decides to levy a harsher tax on private-equity firms that go public. Some predict that such a tax could stunt the buyout boom and deter private-equity firms from future offerings.