After more than a year in hibernation, could the sleeping giant of private equity finally be stirring?
Private equity lawyers appear to be preparing for their busiest period since the start of the credit crunch.
According to market insiders, the industry is bracing itself for a glut of IPOs in the New Year as buyout houses look to clear out portfolios still swollen from the debt-fuelled boom of 2004 to 2007.
According to a report published in The Sunday Telegraph, 12 private equity-owned companies will be floated in 2010, with an estimated combined market value of more than £20bn. There are some household names among them, including Birds Eye, New Look and theme-park owner Merlin.
For the lawyers, it will be a welcome return. According to an Ernst & Young study last month, there was not a single exit through flotation by a private equity owner in 2008, a statistic that speaks volumes about the state of the industry in recent months.
“Inevitably reports like this, which reflect market sentiment that has been building over the last few months, give cause for optimism both to private equity and equity capital markets lawyers,” says Macfarlanes corporate partner Kevin Tuffnell.
Most IPOs take around six months from start to finish, so it is a fair bet that the likes of Ashurst, Clifford Chance, Linklaters and Simpson Thacher & Bartlett are already helping their clients prepare for the New Year.
Ashurst London head of corporate Stephen Lloyd says that his team is working on several flotations, which if successful will raise between £4bn and £5bn.
The prospective IPOs are being accelerated by a combination of resurgent equity markets and the fact that the buyout houses will need to re-service the debt they took on at the height of the M&A boom.
“There’s a whole load of debt that’ll need to be repaid by private equity companies in the five-year period from 2011-12 to 2014-15,” Lloyd adds.”Given that the debt markets are unlikely to be able to produce the money, most people’s view is that there’ll be an enormous number of IPOs.”
One such example is clothing chain New Look. The company was taken private by Apax Partners and Permira in 2004 in a deal worth £700m.
The private equity consortium was advised by Clifford Chance partners David Pearson and now global head of corporate Matthew Layton, who leads the relationship with Permira.
New Look is a profitable business, and is coming to the end of the five-year cycle of investment favoured by buyout firms, but has debts of more than £1bn.
An IPO represents an ideal exit, assuming the markets are willing. The private equity owners could take away £1.7bn from the float, which is being mooted for January, and are understood to have drafted in Clifford Chance again.
Another choice candidate for flotation is Pets at Home, which was bought by a Bridgepoint Capital-led group in 2004.
Travers Smith partner David Innes acted on the original deal and is also advising ahead of the potential IPO.
Both companies are likely to act as a litmus test for the appetite of investors for new stock. “The first people to come out with an IPO are going to be the ones that test the market from a valuation perspective,” says SJ Berwin corporate partner Will Holder.
The trend of the legal advisers from the initial investment being called back for the float is worth noting.
“When you advise the private equity company on its initial investment you tend to advise the portfolio company on an ongoing basis,” says Lloyd. “You already know the target.”
In the absence of any M&A activity, these roles are some of the best around. Each IPO is likely to fetch a seven-figure sum for the law firm acting for the company.
The other main legal role is acting for the underwriting banks, which is less lucrative but still leads to fees in the region of £500,000.
Here, the choice of law firm is less clear-cut. The adviser to the lending banks on the original deal is unlikely to be instructed because of the continuing presence of the acquisition debt.
Occasionally, another of the company’s favourite law firms is given the mandate. For example, when Debenhams was taken private in 2003, Shearman & Sterling represented the lending banks to the buyer, the Baroness Consortium. But when it was refloated three years later, Ashurst, which had been counsel to Debenhams before the buyout, acted for the underwriters.
The top firms for this type of equity capital markets work are Allen & Overy and Linklaters, with Herbert Smith and Ashurst competing just beneath them. All are likely to benefit from the rebirth of the private equity float.
But is this burst of activity a sign of a recovering economy or merely a hangover from some ill-advised investments a few years ago?
“I think it’s a symptom of recovery. You can’t do IPOs unless you have an underlying degree of confidence,” says Lloyd.
Others are more cautious. “The key issue is whether there are more flotations by the mid-market, or whether it’s just the major funds that use the window,” reflects Holder. “The next thing is: will this lead to increased activity across the industry?”
Whatever the wider picture, private equity specialists will be queuing up to take part in the New Year bonanza. And an oft-criticised industry will be back in the spotlight once again.
Possible exits: Acromas (AA and Saga), Birds Eye Iglo
Main adviser: Clifford Chance
CVC Capital Partners
Possible exit: Taminco
Main adviser: Clifford Chance, SJ Berwin
Possible exit: Amadeus
Main adviser: Dickson Minto
The Blackstone Group
Possible exits: Merlin, Travelport
Main advisers: Ashurst, Simpson Thacher & Bartlett
Possible exit: Pets At Home
Main adviser: Travers Smith