Market chaos raises concerns for private equity

Fri Aug 12, 2011 5:22pm EDT

* Private equity stocks slammed as market falls

* IPOs of portfolio companies look tougher

* Lots of cash, low prices create deal opportunities

By Megan Davies

NEW YORK, Aug 12 (Reuters) - Private equity firms frustrated over long-delayed plans to sell companies in their portfolios are bunkering down for an even longer wait.

Buyout executives who a month ago were cheering second-quarter market gains as an opportunity to take their investments public are now worrying that the market turmoil of August could delay their exit plans.

"It seems as though we are talking about events that took place a lifetime ago," Apollo Global Management (APO.N) President Marc Spilker told investors on Wednesday as he discussed the company's second-quarter earnings.

Private equity firms, which make leveraged investments in companies in hopes of selling them relatively quickly to other companies or to the public, have been playing a much longer waiting game than anticipated since the 2008 financial crisis.

"Traditional buyouts will be harder," Spilker said.

The good news, he said, is that low interest rates and deal prices create buying opportunities.

Steven Kaplan, a finance professor at the University of Chicago who specializes in private equity, said however that it may be tough to find willing sellers when valuations are low.

"The question is whether sellers want to sell," he said. "People freeze a bit."

Apollo has the advantage of specializing in buying distressed firms that often have little choice.

A distressed global economy, the firm's long lock-in periods for fund investors, its ability to quickly shift investment styles and "invest up and down the balance sheet" -- in debt or equity -- plays to its strengths, Spilker said.

EXIT TROUBLE

Private equity firms typically cash out by taking companies they buy public or selling them to another company in the same sector. But prospects for IPOs as well as strategic buyers have weakened lately.

"The IPO market has to be more difficult," said Kaplan, noting that the market volatility of late July and early August "compromises exits in the short run."

Spilker said Apollo was sitting on five portfolio companies that have already registered to go public and is engaged in "good dialogue" with potential strategic acquirers. "However, all these realizations are highly market dependent," he said.

The Carlyle Group, a major competitor to Apollo, is even more sensitive to the closing IPO door since it was hoping to file for its own public offering in the third quarter, sources have told Reuters. [nN31113254]

Investors in shares of private equity firms are also concerned about the knock-on effect of the stock market tumult on valuations of firms' portfolio company values.

That's because private equity firms must mark the value of their holdings to a market value every quarter. The volatility of these figures makes it hard to predict the firms' earnings numbers on a quarterly basis.

"They get hit on the mark-to-market side," said Sandler O'Neill analyst Michael Kim, at the same time that they are forced to hold their investments longer than anticipated.

The Dow Jones industrial average .DJI slid 520.29 points on the day that Apollo had its earnings conference call, triggered by worries that Europe's debt crisis could spread to U.S. banks and other financial companies.

Shares of Apollo have dropped 30 percent from their initial $19 listing price on the New York Stock Exchange in March. They fell 2.4 percent to $13.28 in Friday trading.

Shares of other publicly traded private equity firms also are suffering. Blackstone (BX.N) has fallen almost 14 percent this year, closing up 1.7 percent Friday at $13.05. KKR & Co (KKR.N), down about 27 percent this year, closed 0.4 percent higher at $11.05. (Editing by Jed Horowitz and Ted Kerr)