An IPO Resurgence?

Private equity is helping to stoke the fire even as it offers a solid alternative to going public.

Since the bursting of the IPO bubble early in the decade, young companies have had to reconsider the viability of an initial public offering. Certainly, would-be investors have set the bar significantly higher in the past several years, making it clear that product-less, profit-less firms need not apply.

Instead of dying on the vine, some of these startups survived, even thrived, thanks to financing from private-equity investors, which are awash in cash. For these young companies, though, going public still may be in the future.

And in both the venture-capital and private-equity communities, there’s a growing feeling that the future may be 2007, with a significant wave of pre-IPO firms now being nurtured by those private-equity backers.

A Late-stage Boost

David Spreng, managing general partner of Palo Alto, California-based Crescendo Ventures, is one who predicts a more active IPO market this year. “People are holding on to companies a lot longer than they used to, because the IPO market has not been there,” he says. But that strategy is losing favor, he believes, driven in part by the companies themselves, which often chafe at having to wait to go public.

“Going public is the goal,” according to Spreng. “When a CEO is rallying the troops, he’s not planting his flag and telling everyone, ‘Let’s build this company so that we can sell it to a private-equity firm.’”

In last year’s fourth quarter, public offerings picked up, if modestly, with 89 IPOs accounting for more than a third of the year’s total of 228. That number still represented a slip from the 240 in 2005, although the amount raised by companies climbed to $46.1 billion from $36.9 billion. Those offering totals, however, were far short of the 1999 peak of nearly $70 billion (see “Primed for an Uptick?” at the end of this article).

Jeff Andrews, a partner in the technology group of Atlas Venture, predicts that 2007 “will be a tremendous year for IPOs, with the number of offerings up 50 percent,” and featuring “higher-quality offerings than we’ve seen in the past.”

Says Peter Y. Chung, managing partner of Boston-based private-equity and venture firm Summit Partners: “You are seeing a lot of capital available for late-stage pre-IPO financings. Historically, when you needed to raise $100 million of equity capital, the public-equity markets were the only option. Today you can raise $100 million of private-equity capital in a relatively straightforward manner.” Private-equity players that pump money into late-stage start-ups eliminate some of the risk of investing in untested companies, but still stand to benefit from the upside of an eventual IPO.

Among likely high-tech IPOs, says Spreng, are broadband Internet provider Clearwire, of Kirkland, Washington, and Sunnyvale, California-based wireless security-systems company Aruba Networks. Clearwire, now rolling out its wireless broadband Internet and voiceover- Internet protocol service to cities across the country, raised more than $1 billion in August, mostly from venture-capital firms that included Intel Capital and Motorola Ventures. Aruba filed a registration statement for its offering in December.

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