Tags: IPO | venture | capital | private equity

Institutional Investor: Big Private Equity Using IPOs as Debt Swaps

By John Morgan   |   Friday, 26 Apr 2013 07:58 AM

The market for initial public offerings (IPOs) got off to a rousing start this year, but the numbers obscured the fact that many of the deals represented debt swaps for big private equity firms rather than venture capital-backed initiatives for young growth companies, according to Institutional Investor.

Venture-backed IPOs fell to the lowest level in three years, according to the National Venture Capital Association (NVCA) and Thomson Reuters.

The venture capital-backed deals raised only $672 million from eight IPOs in the first quarter, a skid of 52 percent from the fourth quarter of 2012 when $1.41 billion was raised from eight IPOs.

Economist Predicts 'Unthinkable' for 2013

“Political, taxation and sequestration concerns weighed even more heavily on the exit market for emerging growth companies,” said John Taylor, head of NVCA research.

By contrast, Institutional Investor said, because of participation by large private equity firms, the broader IPO market partied on, with 31 deals raising $7.6 billion in the first quarter of 2013.

The broader market for going public resembled a “giant debt swap” in which major private equity players like Blackstone Group and Madison Dearborn Partners, and corporate behemoths like Pfizer, are “cashing in on a buoyant equity market to unload bulky assets.”

Advisory firm Renaissance Capital reported that three of the quarter’s four top-performing deals were leveraged buyouts being recapitalized in the market via an IPO. The average return for all private equity-backed deals was 26 percent.

“And as long as the equity markets stay strong, private equity funds will continue to go to the equity markets for cheap capital to replace debt,” Joseph Cohen, chairman of JM Cohen & Co., told Institutional Investor.

Fewer venture capital firms raised money from their financial backers during the first quarter of 2013 than during any quarter in almost a decade, according to The Washington Post.

The Post concluded the results are proof the industry continues to shrink.

“That consolidation could have implications for the broader economy,” the newspaper stated. “If there are fewer venture firms with fewer dollars in their coffers, that means less money to invest in the promising start-ups that are often touted as creating new jobs.”

But Entrepreneur magazine was more optimistic, saying there is still ample “angel” capital available for start-ups. It cited estimates that less than 1 percent of U.S. companies have raised money from venture capital.

"You're seeing more and more angels stepping up to the plate on a percentage basis compared with venture capitalists," Tracy Lefteroff, a global managing partner of the U.S. venture capital practice at PricewaterhouseCoopers, told Entrepreneur.

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