Private equity firm's IPO plan on NYSE stalls

— -- There's at least one three-letter acronym that KKR can't seem to master: IPO.

Stalling a two-year quest to launch an initial public offering on the New York Stock exchange, KKR Wednesday amended a backdoor plan to go public in Europe.

The complicated plan, expected to close next quarter, would merge the private equity firm with an associated firm, KKR Private Equity Investors. Since KKR Private Equity Investors trades on the Euronext Amsterdam exchange, the maneuver would give KKR access to the market there.

KKR's latest plan sweetens its initial offer made last year by giving KKR Private Equity's owners 30% of the new company, up from the 21% slice it offered before.

Gaining access to a public stock market is critical for KKR to allow its partners and founders to sell some of their holdings, says Ray Ritter, professor of finance at University of Florida. "The main motivation is just for the senior partners to be able to cash out," he says.

But these insiders may have missed their chance to cash in at a time when demand for such financial firms was at historic levels.

The company tried to go public in 2007 following the successful IPO of rival Blackstone, at a time when investors were willing to pay astronomical amounts for a piece of a private-equity firm. Cheap debt in the mid-2000s turned private-equity firms into virtual money printing presses, because they could buy companies, add borrowed money and sell them for a profit.

But KKR delayed its IPO as the environment for private-equity firms became increasingly challenging. Private equity firms are now faced with banks that are unwilling to lend for risky buyout deals and the value of debt-laden companies they already bought are falling. Investors are just not as enamored as they were with the private-equity model, says Francis Gaskins of ipoDesktop.com.

"KKR missed their (IPO) window and is now trying to crawl back in under a crack," Gaskins says. "This is the crack."

Investors who bought shares of other private-equity firms that went public just before the financial crisis are feeling the pain. Shares of Blackstone are down 68% from their first-day closing price in June 2007. Shares of Fortress Investment Group are down 88% from their first-day closing price, also in June.

"There's just not much of an appetite for this type of financial firm," in today's IPO market says Kathy Smith of Renaissance Capital.

Only making things worse, demand for IPOs at large has been weak. With the end of the first half a week away, just 11 IPOs have started trading this year, Renaissance says, down from 35 and 133 in the first six months of 2008 and 2007, respectively

Smith, though, says investors shouldn't confuse the IPO market's shunning of private-equity companies as a commentary on the IPO market as a whole.

Four IPOs of non-financial companies are expected to make their debut this week, Smith says, making it the busiest week for IPOs since April 2008, Smith says. And the FTSE Renaissance IPO Composite index, which tracks the performance of IPOs once they start trading, is up nearly 18% this year.

"Money is going into these new stocks," Smith says. "But the market is still picky."