Wall Street’s Latest Pitch Is a Contradiction: Private IPOs

livemint.com:

Private-equity firms are desperate to cash out of investments. But enthusiasm for initial public offerings is low after several stock-market debuts flopped. Enter so-called private IPOs.

The concept is being bandied about on Wall Street as investors and bankers search for ways to keep the money flowing. The contradictory moniker refers to stock sales in which early backers privately sell to longer-term investors such as mutual funds or sovereign-wealth funds, sidestepping the traditional IPO process. Private IPOs don’t come with the splashy bell-ringing ceremony of a traditional debut or result in publicly traded stock.

They do allow companies to avoid the potential embarrassment of a new listing falling flat. Some on Wall Street balk at the name, seeing it as window dressing for private placements, which are sales of shares from one private owner to another and have been used for years. Skeptics say bankers, never a group to sit still, are playing with semantics to drum up business.

What’s more, some mutual-fund managers who have been approached to do private IPOs are wary. While they might get better prices and bigger allotments of shares in a private IPO, the liquidity—or lack of it—is a big drawback. If the managers buy stakes this way, it isn’t clear when they would be able to sell them.

Proponents of private IPOs say they lay the groundwork for a future stock-market debut. Most important, they allow private-equity owners to return capital to their investors who have been frustrated by a drop in deal activity. They can also give impatient employees the chance to sell stock.