Blackstone Group LP and KKR & Co. both had their worst one-day declines in more than a year yesterday on concern that a falling stock market will hinder the buyout firms’ ability to sell companies.
The number of initial public offerings worldwide jumped 23 percent in the first half to 901 deals, according to data compiled by Bloomberg, and the stronger market enabled private- equity firms to sell companies at a profit, increasing distributions to investors and bolstering their own fees.
That start may be at risk if equity markets keep struggling. Blackstone, the world’s biggest buyout firm, fell 11 percent in New York trading, more than twice the Standard & Poor’s 500 Index’s 4.8 percent decline in a global equity-market rout. Apollo Global Management LLC, which began trading on March 30, suffered its worst day and closed at its lowest price.
“You’re not immune in private equity if valuations come down and the IPO market is soft,” said Paul Schaye, managing partner of New York-based Chestnut Hill Partners, which helps private-equity firms identify buyout targets. “They need to have great exits.”
Market volatility may damp investors’ appetite for highly leveraged deals, after private equity-backed IPOs had their best start this year since at least 2006. GNC Holdings Inc., backed by Ares Management LLC and Ontario Teachers’ Pension Plan, has gained 49 percent since its March 31 IPO.
HCA Holdings Inc., the hospital chain partly owned by KKR and Bain Capital LLC, raised $4.4 billion in March in the biggest-ever private equity-backed IPO, according to London- based research firm Preqin Ltd. The company has declined 24 percent since its debut.
Firms have a long list of companies they’re trying to sell profitably. A record $1.6 trillion in leveraged buyouts were completed from 2005 to 2007, according to Preqin.
“There are dark clouds gathering over the market for private-equity IPOs,” Josef Schuster, founder of Chicago-based IPOX Schuster LLC, which invests in IPOs and oversees about $2.5 billion, said in telephone interview.
“Investors are going to be much more selective with the private-equity IPOs they choose to invest in and it will be harder for the firms to exit at rich valuations,” Schuster said. “Macro risk has increased and individual deals, such as HCA, have sharply disappointed.”
A bear market would be another setback for private-equity firms that endured a near-halt in exits and deal-making for more than two years after the global financial crisis triggered in part by the 2008 collapse of Lehman Brothers Holdings Inc.
Some IPOs already done this year have rewarded firms and investors.
Kinder Morgan, Nielsen
Kinder Morgan Inc., the energy-pipeline company whose owners include Carlyle Group, raised $3.3 billion in its February IPO. Dunkin’ Brands Group Inc., the coffee and baked goods chain backed by Bain, Carlyle and Thomas H. Lee Partners LP, surged 47 percent in its July 27 trading debut after raising $486 million. Nielsen Holdings NV, the media research company owned by Blackstone, KKR, Carlyle and Thomas H. Lee Partners, has increased 22 percent since its January IPO.
Still, IPOs for companies such as Toys “R” Us Inc., which filed in May 2010, have yet to be completed.
Caesars Entertainment Corp., the world’s biggest casino company, canceled a proposed $500 million IPO in November. Chief Executive Officer Gary Loveman said in May the company may seek an alternative equity listing within 18 months.
Apollo and closely held private equity firm TPG Inc. took Las Vegas-based Caesars private in January 2008 for $30.7 billion including debt and transaction costs.
Growth outlooks have deteriorated globally as investors lose confidence amid “political gridlock” and fiscal issues in the U.S. and Europe, Michael Novogratz, a principal and co-chief investment officer of Fortress Investment Group LLC’s macro funds, said yesterday on an earnings conference call.
Markets are “waking up to the fact that this is going to be a long, hard grind out of this deleveraging, it could last three to four more years,” Novogratz said. “We foresee a very choppy environment where the broad move is lower in equities with big short squeezes to the up side, with rates low for a long period of time and the dollar under continued pressure.”
Blackstone lost $1.66 to $13.72 in New York Stock Exchange composite trading yesterday, after a 3.9 percent decline on Aug. 3, and Apollo Global slid $1.80, or 11 percent, to $14.93. KKR declined as much as 11 percent before closing down 80 cents, or 6 percent, to $12.59, extending a 5.3 percent drop after weaker- than-expected quarterly earnings.
Fortress, which reported profit short of analysts’ expectations and said it would reinstate a dividend, declined 36 cents, or 8.8 percent, to $3.72. Brookfield Asset Management Inc. fell $1.47, or 4.9 percent, to $28.65. Brookfield is based in Toronto and the other four firms in New York.
When Blackstone, Apollo and, for a time, KKR dropped more than 10 percent, they each triggered a Securities and Exchange Commission circuit breaker that temporarily stops short selling. Short-sellers bet on a decline by borrowing shares and then selling them, hoping to buy them back later for less.
For four of the firms, it was the worst performance in at least a year, according to data compiled by Bloomberg.
Blackstone’s close represented the stock’s biggest one-day decline since April 20, 2009, and lowest finishing price since Dec. 20. KKR delivered its biggest drop since joining the NYSE on July 15, 2010, and lowest closing price since Nov. 30.
Fortress had its steepest one-day decline since May 6, 2010, and lowest closing price since Oct. 4, and Brookfield fell to its largest single-day drop since June 4, 2010, and lowest close since Oct. 4.
The S&P 500 tumbled 60.27 points to 1,200.07, a 12 percent drop from its April 29 peak and weakest level since Nov. 30. The more than 10 percent decline since April 29 means the index has entered what is known as a correction. The Dow Jones Industrial Average tumbled 512.76 points, or 4.3 percent, to 11,383.68. The MSCI World Index of developed markets slid 4.3 percent.
Two-year U.S. Treasury yields plunged to a record low amid concern the economy is weakening.
Speculation that the global economy may relapse into a recession has driven investors out of stocks and into the relative safety of Treasuries, the Swiss franc and Japanese yen, and is spurring speculation the U.S. Federal Reserve will start another stimulus program.