Slowest IPO Quarter In Recorded History

First, I'll be clear that recorded history, as far as VC-backed IPOs are concerned, goes back only about 30-years. That said, June 2008 will go down as the slowest month with zero, that right, zero, IPOs backed by private equity firms. Compared to the same quarter last year, there were 101 IPOs; this quarter that number is 49 in the U.S. Of course, Wall Street is trying to read between the lines and come to some sort of conclusion about the viability of the private equity industry as a whole, which I feel is simply unjustified.

Of course, I shouldn't be too surprised. The media is only doing what it always does: take a story and sensationalize it to grab viewers' attention and sell a few more ads. The reality is that the private equity business is a business like any another and responds to market conditions like any other. The slow-down in IPOs does not necessarily mean that there are fewer firms prepared to go public, but rather that there are few firms that VC firms are prepared to sell in this particular market. The folks behind these firms are pretty smart; they'll exit their investments when they believe they can get the greatest return on their buck. This market, not surprisingly, does not appear to offer the kind of deals that they're looking for. End of story.

Energy Fund's Public Offering Less Than Well Received

Eric Sprott's Sprott Inc. went public late last week at a price of $10 per share on an issue of about 16% of the total equity in the firm and proceeded to dip by as much as $0.50 and ended the week (before the Canadian long weekend) down $0.23. Having raised $200 million, this gives Mr. Sprott's firm a valuation of approximately $1.5 billion, which is great, but also leaves Mr. Sprott scratching his head as to the cause of the dip.

Mr. Sprott said, in an interview with the Globe and Mail newspaper, that he believed the less-than-stellar result in the companies first public showing to be the result of short-sellers betting against his company. What's surprising about this, however, is that even a freshman finance student knows that that's quite unlikely to be the case with any IPO. Short-selling requires a stock to be borrowed and then sold in order to profit from any decline in the stock's price. However, an IPO means that the stock is just entering the market and is unlikely to be available in brokerage accounts for any borrowing to take place. Consequently, many believe that the true cause of the fall in Sprott Inc.'s stock price is due to its fundamentals.

As a hedge fund betting on metals and energy, Sprott Inc. is certainly in the industries making the news these days. That said, they're making the news because their prices are constantly breaking record highs and many are questioning for how much longer this trend can continue. Ask Mr. Sprott and you're sure to get the answer that you'd expect, but apparently the market sees things differently and are valuing the fund at less than what Mr. Sprott had anticipated. Beyond the impact to Sprott Inc., this result has interesting implications for the economy as a whole; what is happening with the energy industry and how much longer can this go on. Is it, in fact, time to go short or do you believe some reports that gasoline may soon see double-digit prices per gallon at the pumps?

Tesla Motors IPO expected later this year

Mr. Elon Musk, Chairman of Tesla Motors, says that he believes that the company will be able to raise as much as $100 million in an IPO later this year; this, in an economy that has others cancelling their public offerings in light of declining growth and expectations.

Tesla, backed by some big names, has had some great publicity that many analysts believe will help them with a successful offering irrespective of the economy. Mr. Musk, himself, a co-founder of Paypal (now owned by eBay) has rounded up investor support from others such as Sergey Brin and Larry Page who have already placed orders for their own Tesla cars - all of which has helped attract attention to the company's all-electric sports cars.

Mr. Musk suggested that the company will seek one more round of funding to help bridge its plans for developing its whispered-about luxury model before pushing for the IPO. With its current, standard, model fetching about $100,000, the price of its luxury model will not be cheap. Of course, with the public's ongoing penchant for all-things-green, there's little doubt that it's Lotus Elan-inspired model will continue to turn heads and empty wallets.

Apollo's Ego Hurt with IPO down 23% in Debut

It's not often that you hear about a losing IPO so I though that I would highlight Apollo's experience with Verso Paper that fell 23% in its market debut today. It was originally priced at between $16 and $18 and ultimately hit the market at $12 and proceeded to fall to a market close of less than $10 per share. That hurts.

Verso Paper, formed by Apollo Global Management in August of last year as part of a spin off from International Paper Co. Producing the thin, but glossy, paper products that are used in magazines, there's not doubt that it's been struggling in recent years. That said, Verso has reported profits for its most recent quarter following significant losses prior. The spin-off, then, seems to have been a prudent move - allowing the new management team to streamline its operations and refocus its business.

Don't worry, Apollo is still making a good buck on the deal. The original price of about $17 per share would have represented a doubling of its investment, so even a valuation at $10 is profitable if not just a little ego-busting. If you'd like to track it going forward, it's on the NYSE under ticker symbol: VRS

Public Private Equity?

When does a company go public? The simple answer is whenever its private owners feel that they can get the most for their shares. Elaborating a little further, you might also time it such that it precedes a decline in the value of those shares. Well, private equity firms are no different.

Coming off of a great run starting shortly after the dot-com bubble burst earlier this decade, private equity firms are lining-up at the SEC to file their registrations for public offering. The Blackstone Group already went public and now KKR and Apollo are set to go next. There is no doubt that the partners behind these firms know exactly what they're doing, but there is a something to be said for the dilution of those firms' mission statements that follows their IPOs.

Harvard Business School professor Josh Lerner said it well in a Fortune magazine article this month. Going public necessarily means that the firm's management must now begin to focus on what it never had to consider in the past: the quarterly reports. While benign unto themselves, the implications are profound.

Quarterly reports, as we all know, are scrutinzed to no end. Markets rise and fall with the slightest deviation from expectations. Consequently, management does all that it can to meet or exceed those expecations. However, it must do so in consideration of the fact that it must repeat that same feat only 3-months later all over again. The result, as you might expect, is a steadying of the earnings to ensure consistent returns and profits. While this is, of course, a sound business practice, this does seem to go against the general reasons for which people seek venture capital as part of their investment portfolios in the first place. If we wanted steady returns and lower-risk, then wouldn't we go elsewhere?

In the end, this is likely just an example of the life cycle of any company. While it may leave us private equity fans just a little saddened, it's probably only fair to not suggest that these firms should behave any differently than any other. It's just that private equity firms are our heroes. They do the deals that make headlines and form the basis of great books, magazine articles and sometimes movies. When is the last time you watched a movie about a bank lending some money? Exactly.