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Based in Livermore, CA, Performant Financial (NASDAQ:PFMT) scheduled a $150 million IPO with a market capitalization of $586 million at a price range mid-point of $13, for August 10, 2012.

Five other IPOs are scheduled for the week of August 6. Full IPO calendar available here.

On July 30, PFMT filed an updated S-1.

UNDERWRITERS
Manager, Joint Managers: Morgan Stanley; Goldman, Sachs; Credit Suisse; Wells Fargo Securities
Co Managers: William Blair; SunTrust Robinson Humphrey

SUMMARY
PFMT is a debt collector with increasing dependence on the U.S. Department of Education. A smaller business segment collects Medicare debts.

Revenue for the June 2012 quarter increased 18% from the March 2012 quarter, to $54 million from $46 million. Net income increased to $8 million from $2.5 million, partially because of hold-ups from the Department of Education, see below "Problems dealing with the Federal Government."

Private equity sponsor Parthenon Capital Partners will receive 83% of the IPO proceeds and a $1.3 million "management" termination fee, plus 1% of the gross IPO proceeds.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Anualizing June 2012 Qtr

Cap (MM)

Sales

Earnings

BookValue

TangibleBV

in IPO

Performant Financial (PFMT)

$586

2.71

18

125

-5.0

25%

COMPARE

Annualizing Most Recent Qtr

Cap

Sales

Earnings

BookValue

TangibleBV

Net Profit %

Performant Financial (PFMT)

$586

2.71

18

125

-5.0

15%

Debt collectors
Asset Acceptance Capital (AACC)

$178

0.75

12

1.2

1.3

6%

Portfolio Recovery Associates (NASDAQ:PRAA)

$1,470

2.63

14

2.4

3.0

18%

Mentioned as competitors in S-1
but debt collection seems to be a small part of their business
HMS Holdings (NASDAQ:HMSY)

$2,910

6.06

56

6.9

9.5

11%

CGI Group (NYSE:GIB)

$6,090

1.43

14

2.5

-15.1

10%

OBSERVATIONS
Based on annualizing recent quarters, PFMT is priced at a premium to AACC and PRAA, probably based on PFMT's relationship with the U.S. Government. That relationship, however, is a double-edged sword.

Yes, PFMT seems somewhat favored by the U.S. Department of Education based on recent financial performance.

CONCLUSION
PFMT may increase somewhat from its IPO price based on recent results. IPOdesktop is concerned, however, about future reliance on the Department of Education for contracts that will be competitively bid in 2014.

Some investors might like PFMT's future risk/reward ratio, but in general, IPOdesktop does not favor companies that are heavily dependent on the federal government.

Glossary
RAC: Recovery Audit Contractors
GAs: Guaranty Agencies
SAFTA ACT: Student Aid and Fiscal Responsibility Act
CMS; Centers for Medicare & Medicaid Services

BUSINESS
PFMT is a debt collector with two main business segments: student loans and healthcare payments.

In the student loan recovery business, PFMT is one of 17 unrestricted providers of recovery services on the current Department of Education contract. Some of the GAs (Guaranty Agencies), including the Department of Education, may only engage a few recovery vendors at any time.

In the recovery of improper healthcare payments, PFMT is one of the four prime RAC (Recovery Audit Contractors) contractors in the United States.

TRENDS
Based on the SAFTA ACT, in the future the U.S. Department of Education will become the arbiter of student loans. IPOdesktop believes it is not healthy for a company to be dependent on the U.S. government for a majority of revenues.

STUDENT LOAN RECOVERY MARKET
As a result of SAFRA (Student Aid and Fiscal Responsibility Act) the Department of Education will ultimately become the sole source of revenues in this market, although the GAs will continue to service their existing student loan portfolios for many years to come.

As a result, over time, defaults on student loans originated by the Department of Education will predominate, and PFMT's ability to maintain the revenues it had previously received from a number of GA clients will depend on its relationship with a single client, the Department of Education.

RISKS
As a result of SAFRA, which terminated the ability of the GAs (Guaranty Agencies) to originate government-supported student loans, some have speculated that there may be consolidation among the 32 GAs.

If GAs that are PFMT's clients are combined with GAs with whom PFMT does not have a relationship, PFMT could suffer a loss of business.

PFMT currently has relationships with 12 of the 32 GAs, and three of PFMT's GA clients were each responsible for more than 10% of PFMT's total revenues in 2011.

Government Regulation
The nature of PFMT's business requires that PFMT adheres to a complex array of federal and state laws and regulations. These include HIPAA, the FDCPA, the FCRA, and related state laws
Each of the markets that PFMT serves is highly regulated.

For example, the passage of SAFRA in 2010 had the impact of transferring the origination of all government-supported student loans to the Department of Education, thereby ending all student loan originations guaranteed by the GAs. Loans guaranteed by the GAs represented approximately 70% of government-supported student loans originated in 2009.

COMPETITION
In connection with the renewal of the CMS contract, which expires in 2014, PFMT expects that competition will include the other three RAC service providers: Health Management Systems, Connolly Consulting, Inc. and CGI Group.

CGI debt collections management seem to be a small part of CGI.

Health Management Systems, Inc., is a division of HMS Holdings.

Pre-IPO SHAREHOLDERS
Parthenon Capital Partners owns 82% of PFMT pre-IPO.

EMPLOYEES
As of March 31, 2012 PFMT had 1,300 full-time employees.

USE OF PROCEEDS
PFMT expects to net $21.5 million from the sale of 1.9 million shares. Shareholders expect to sell 9.6 million shares, or 83% of the IPO.

Proceeds are allocated to pay a $1.3 million fee to terminate an Advisory Agreement with an affiliate of Parthenon Capital Partners, plus a transaction fee equal to 1% of the gross proceeds of the offering.

The balance is allocated to working capital and general corporate purposes.

Source: IPO Preview: Performant Financial (PFMT)