Top private equity firms like The Blackstone Group L.P. (NYSE:BX) and Apollo Global Management LLC (NYSE:APO) are furiously cashing out investments they've held for years through a wave of initial public offerings of brand-name companies like Norwegian Cruise Line Holdings (NASDAQ:NCLH), SeaWorld Entertainment (NYSE:SEAS) and, coming soon, Neiman Marcus. Those IPOs -- and some lucrative sales -- have made huge profits for these firms and their investors, sending earnings of private equity firms soaring.
They've also given a jolt to the overall IPO market, which is having its best year since 2006 as venture capitalists add to the feeding frenzy by bringing new companies to market at a faster pace. For private equity firms, this may simply be the natural unwinding of a lot of deals they did in 2006-07 and which now have found their exit in a strong equity market. That's the way the business is supposed to work.
But it also could indicate stocks have moved into lofty territory, and shrewd private equity managers are simply getting out while the getting's good, fobbing off the risk on buy-side institutions and the investing public. If you think I'm exaggerating, listen to what top private equity executives themselves are saying.
Here's Blackstone President Tony James:
With credit markets hot and equities strong, this is a better time for selling assets than for buying.
And Leon Black, chairman and CEO of Apollo, even invoked the great Biblical language of Ecclesiastes:
'There is a time to reap and there's a time to sow,' he said. 'We're selling everything that's not nailed down in our portfolio.'
And maybe a few things that are nailed down. According to Bloomberg BusinessWeek, Apollo took in $14 billion from the sale of assets from the first quarter of 2012 through this year's first quarter. He's hardly alone. While the number of new buyouts has dropped dramatically, the pace of exits has accelerated: $68.6 billion in the second quarter, double the dollar volume of the first quarter, according to Mergermarket.com.
Here are some big-name private equity companies that have cashed out or plan to this year through sales or IPOs:
- In January, Norwegian Cruise Line, owned by Apollo and TPG Capital, went public in an IPO whose $477 million net proceeds were used to pay off debt. Apollo and TPG will sell millions more shares in a secondary offering announced July 31.
- In March, Blackstone took New Jersey-based Pinnacle Foods (NYSE:PF) public in an IPO that raised $627 million. The maker of Birds Eye, Log Cabin, Duncan Hines, and Aunt Jemima foods will use all the proceeds to pay off debt.
- In May, Valeant Pharmaceuticals International (NYSE:VRX) of Canada paid $8.7 billion for Bausch & Lomb, which had already filed for an IPO. Private equity firm Warburg Pincus will make nearly three times its initial investment in the eye-care company.
- TPG, Warburg and Leonard Green & Partners plan to take high-end retailer Neiman Marcus public through an offering whose proceeds will go to -- surprise, surprise -- the private equity owners.
- Blackstone and two co-owners already have filed for an IPO of Extended Stay America, and it has hired JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS) to explore a sale or IPO of La Quinta Inns. Later this year it may take Hilton Worldwide public in a mammoth offering. Altogether, Blackstone could unload commercial real estate worth as much as $50 billion this year, including debt, The Wall Street Journal reported.
But Blackstone's huge windfall in the SeaWorld offering really was in an ocean all by itself. SeaWorld operates 10 theme parks throughout the U.S., including SeaWorlds in Orlando, San Diego, and San Antonio, Busch Gardens in Tampa, and Sesame Place in Pennsylvania. SeaWorld may wow the kiddies with its diving dolphins and plunging orcas, but the real spectacle was how much money Blackstone could squeeze out of this company with a modest $1.5 billion in sales.
Even before going public again, SeaWorld paid Blackstone $627 million in special dividends and fees. Then Blackstone sold 19.9 million shares in the April IPO at $27 a share, and altogether took in about $560 million from the offering. That "pushed Blackstone's SeaWorld investment solidly into the black," The Journal reported.
But after the IPO, Blackstone still owned more than 60% of SeaWorld's outstanding shares, which will allow the firm and its investors to cash out for years. Clearly for Blackstone, SeaWorld is the gift that keeps on giving. Shamu should demand stock options. (Blackstone did not respond to requests for comment or to emailed questions by deadline.)
As I said, this is how the private equity game works. Private equity firms buy unloved or underperforming companies, fix them, cut costs, and then take them public in a few years, often after loading them up with debt and extracting huge special dividends. There's a big bottleneck of companies private equity firms bought before the financial crisis, and as the median holding period approaches six years, investors are getting antsy to cash out.
And it may not be a sign of a market top, either, but of a strong equity market that will see more of these grandiose deals before the greed and excess go way too far. But if billionaire private equity chieftains, who have the very best information on the markets, the economy, and their portfolio companies, are selling with both fists, should you really be buying with both hands?