The Wall Street Journal-20080128-IPO Outlook- Deal or No Deal- Two IPO Views- Can Private Equity Keep as Active In Credit Crunch-

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IPO Outlook: Deal or No Deal: Two IPO Views; Can Private Equity Keep as Active In Credit Crunch?

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The forecast for initial public offerings backed by private-equity firms this year breaks down into two camps: Those who believe that they will once again account for nearly half of the deals and those who predict there will be a big slowdown.

These deals have accounted for a large chunk of IPOs in the U.S. over the past three years, as firms like Blackstone Group LP and Kohlberg Kravis Roberts & Co. bought large companies using cheap financing and turned them around to the public market for a profit.

Since credit became more expensive, and harder to get, after the subprime-mortgage meltdown began last summer, buyouts have become tougher as well. But the opportunity to sell holdings via an IPO remained; some 42% of all new offerings last year came from private- equity shops, down just slightly from 44% in 2006, according to data tracker Dealogic.

Those deals also started well. On average, IPOs backed by private- equity firms returned 18% on their first day of trading, compared with 10% for all other IPOs, by Dealogic's calculations.

Should financial markets remain unstable this year, the number of IPOs is likely to fall. But bankers and some market observers say private-equity-backed offerings nonetheless will remain a large share of the deal flow. As long as borrowing terms remain pricey, buyout shops will spend more time selling companies they already own rather than buying new ones, the thinking goes.

"Given how difficult the credit markets have been, that has created more challenges for buyouts," says Stephen Pierce, head of equity capital markets for the Americas at Goldman Sachs Group. "As a result, there will be more focus on harvesting from existing portfolios."

Maria Pinelli, Ernst & Young LLP's Americas director for strategic growth markets, says she believes IPO activity this year will be "robust."

"The pipeline of IPOs is dominated by the technology, health-care and energy-industry sectors -- sectors which private equity and venture capital play strongly in," she says.

About 35% of the companies that have filed to go public have at least one private-equity backer, according to Dealogic's data.

But others believe that the chance to sell shares on reasonable terms ended last year. They say investors will be more selective about investing in companies that carry a lot of debt -- often a hallmark of a private-equity-backed deal.

Kevin Landry, chairman of private-equity firm TA Associates, said his firm focused taking companies public early last year because the environment looked too good to pass up.

"We'd been in a bull market since October 2002. I didn't know when it would end, but I knew we couldn't ride it over the top and not harvest stuff. Not to would be idiotic," says Mr. Landry. Offerings involving his firm last year included cellphone carrier MetroPCS Communications Inc. in April and business software firm PROS Holdings Inc. in June.

This year's market will be much different, he says. The salad days of borrowing money to finance special dividends ahead of IPOs are over, and investors may be too rattled by the prospect of a recession to take many chances on new stocks.

"I think it's going to be a slow year," he says.

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