After a prolonged dry spell, banks soon could begin to see a pickup in demand for buyout loans.
The reason: A softening market for initial public offerings, or IPOs, is expected to create opportunities for deal firms to buy companies in the private market.
"The IPO market certainly has in some instances absorbed businesses" that otherwise would have been sold privately through leveraged buyouts, said Nicholas Forstmann, senior partner at Forstmann, Little & Co., the New York buyout firm.
"We have recognized in the last year or so that properties that might have been sold privately have been sold in the public market," added Donald J. Gogel, principal at Clayton, Dubilier & Rice, another prominent New York buyout firm.
Now, the cycle seems to be turning.
Big Backlog, Slow Pace
While there is still a big backlog of IPOs waiting to come to market, the pace of completed offerings is slowing, along with the pace of new filings, said Mark Basham, who tracks the new-issues market for Standard & Poor's Corp.
As a result, Mr. Gogel said, he is "reasonably comfortable" that new buying opportunities will arise in the private market.
"We've already seen it," said Jonathan Sokoloff, general partner at Leonard Green & Partners. The Los Angeles buyout firm is already looking at one former IPO candidate.
Bankers, too, said there are signs that buyout activity could be picking up.
Irons in the Fire
"There was a period when nothing was going on," said Charles Kiley, managing director and head of the syndication department at Bankers Trust New York Corp. "Now, I'd say in each of the deal shops we talk to, there are new opportunities being looked at."
"I'm pretty optimistic that this business is not as bleak as people think it is," said Dominick Baione, head of acquisition finance at Chemical Banking Corp.
The flip side, of course, is that a softening IPO market means fewer opportunities for banks to refinance the debt of companies returning to public ownership. For nearly a year, reverse leveraged buyouts have been one of the few bright spots for banks' deal flow.
For the deal firms, too, there's a downside to the softening IPO market.
"It's a good news-bad news story," said Stephen A. Schwarzman, president and chief executive officer of Blackstone Group in New York.
On the buy side, dealfirms have had a hard time competing against the multiples that companies have been fetching in the public equity markets.
But on the sell side, deal firms themselves have been tapping into the IPO market, issuing stock in companies they took private during the buyout-happy 1980s.
CNW Emerges from Buyout
For example, Chicago & North Western Holdings Corp., taken private by Blackstone and CNW management in 1989, recently completed an initial public offering of common stock.
But as a result of the now-softening IPO market, Blackstone is taking a wait-and-see attitude about further public offerings this year by companies in its portfolio, Mr. Schwarzman said.
Similarly, only the strongest companies in Clayton, Dubilier & Rice's portfolio remain IPO candidates, said Mr. Gogel.
Clayton Dubilier took BW/IP International public last year, and completed an initial public offering of O.M. Scott & Sons this year. Both companies were acquired by the buyout firm in 1987.
While no one expects banks to open the floodgates for new buyout financing, lenders recently have been courting the deal firms more aggressively. And the marketing effort hasn't been limited to the big money-center banks.
Among those making the rounds these days is Banque Indosuez. Jean-Claude Gruffat, a senior vice president in the French bank's New York office, said the bank started pitching its capabilities last month, when it sensed the IPO market was cooling off.
Banque Indosuez sat out the LBO craze of the 1980s because the capital structures were too aggressive, Mr. Gruffat said. But with today's more conservatively structured deals, the bank is now touting its ability to provide various layers of financing, including bank debt, subordinated debt, and quasi-equity.
Still, bankers and deal firms generally agree that the loan syndication market for buyout financings remains fairly shallow-at least by 1980s standards.
Most agree that there is probably no more than about $1 billion of bank financing available for any given deal. Banks generally require 30% to 35% of equity financing and an additional layer of subordinated debt beneath the senior bank financing.
"It's an acceptable financing market," said Blackstone's Mr. Schwarzman. "Banks are willing to provide funds, though the fees are appreciably higher."