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Private Equity's IPO Strategy for Retailers Proving a Risky Gamble

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The decades-long private equity game of taking retail chains private, waiting a few years, then making a nice buck on an IPO seems to be no longer paying off. In February, private equity player Golden Gate Capital announced it was taking the Express apparel chain public, citing a price of as much as $20 per share. But on May 13, the firm cut the offering price to $17 per share because of insufficient demand, according to Bloomberg.

The low demand problem seems to be widespread among a range of industries, according to a story in today's New York Post, as investors are wary of IPOs backed by private equity firms. That could have negative implications for a number of privately-held retailers. During the most recent boom, private equity firms bought a record number of retail chains, planning to eventually take them public. There have been rumors, for instance, that Bain Capital, Kohlberg Kravis Roberts and Vornado Realty Trust plan an IPO for Toys 'R' Us this summer, five years after taking the chain private.

But private equity's profit margins from this strategy might be shrinking. When Kohlberg Kravis Roberts decided to sell shares of Dollar General, arguably one of the stronger retail performers in today's market, in the fall of 2009, it priced the shares at $21 each, at the low end of expectations. Now the Express deal hasn't turned out as well as expected. Will that mean private equity firms will hold off on IPOs for the foreseeable future? Since these firms don't specialize in retail operations, this might prove a bad break for the retailers.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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