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Buyout Kings Not Back on Throne Yet


A few positive signs for private equity doesn't translate to a comeback.

The troubled private equity giants have found a few reasons to celebrate recently, but it's far too early to declare it a rockin' party.

The Blackstone Group (BX) reported better-than-expected earnings on Thursday and KKR and Silver Lake Partners watched one of their portfolio companies, Avago Technologies (AVGO), become the most successful IPO so far this year.

Many of the companies that were bought out during the private equity frenzy several years ago are beginning to return to respectable levels of growth and some managers are hoping the recent activity in the IPO markets will turn into a full-fledged open window. KKR is reportedly prepping several portfolio companies for the public markets, including Dollar General.

Making matters even better for some of the big guys, there are signs that hedge funds are starting to show signs of life again. Blackstone executives said during a conference call that they are seeing more interest from old and new investors in their hedge funds, which total about $25 billion.

All this good cheer resulted in a 6% drop in Blackstone shares on Thursday. They had soared by more than 25% in the days ahead of the earnings and it seems the numbers didn't quite live up to investors' expectations.

Blackstone president Tony James highlighted that two-thirds of its portfolio companies are expected to post flat or positive earnings growth this year. That's a respectable number, but James struck a cautious note on the earnings call, emphasizing that Blackstone is not preparing to jump through the same IPO window that KKR seems determined to open. "I don't promise a lot of exits," he said. "We try to create a lot of value over a long period of time for our investors. We will be disciplined."

With good reason. As the Wall Street Journal notes, the earnings growth in Blackstone's portfolio companies doesn't include interest payments on debt. The burden from the $1.6 trillion worth of leveraged buyouts between 2005 and 2007 is still largely being carried by the companies that remain in private equity portfolios like Blackstone's. The public markets won't buy the earnings growth story from IPO candidates until more of their debtload has been lifted, something that could still be years in the making.

The Journal highlights other private equity-backed IPOs in the works, including Emdeon, owned by General Atlantic, among others, and the holding company for the Vitamin Shoppe chain, owned by Irving Place Capital.

But it's premature to call the IPO market open for business. On the same day that Avago became the best performing IPO of the year, the debut of CDC Software (CDCS) became its worst, with its shares falling by 17 percent. That hardly makes for a frothy IPO market.

In what sounds a bit too much like another, the Los Angeles Times has a peculiar story about a tattoo removal firm called Dr. Tattoff, whose CEO says demand is so high for erasing ink that he hopes to take his company next year. This, despite the fact that the company currently operates just three clinics.

Most of us want to erase mistakes from our past, but especially some of the private equity managers who rode the buyout boom all the way to the top of the market. Unfortunately, a quick laser treatment won't always do the trick. Sometimes it takes a long period of reflection before the scars begin to disappear.
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