Investment deals taking longer; firms see possible cracks in IPO windows
The U.S. government shutdown is creating uncertainty and could result in deals taking longer to close and private equity-backed companies missing the first IPO window of 2019, some private equity industry insiders say.
"At this point, it's not shutting down deals, but (the government shutdown) is prolonging deals," said A.J. Weidhaas, Los Angeles-based partner and co-chairman of the private equity group at law firm Goodwin Procter LLP.
The government shutdown is also slowing the IPO exit route, said Keith Townsend, Atlanta-based partner and head of capital markets at law firm King & Spalding LLP.
"The shutdown is having a real-world impact on the IPO market generally, which includes private equity-backed companies, venture capital-backed companies and entrepreneurial-backed companies," Mr. Townsend said.
Generally, an initial public offering window opens from January to mid-February and then opens again in mid-March after companies release their audited financial statements, Mr. Townsend said.
"The first window is basically shut" due to the lack of staff at the Securities and Exchange Commission who need to approve a company's registration, he said.
Timing is crucial for an IPO. A delay could mean the difference between favorable market conditions or a market turn that could put off the IPO entirely. Without the IPO, investors would have to turn to a merger or acquisition to exit the investment. However, the government shutdown is delaying those transactions, too.
One reason for the roadblock is the staffing problem at the Federal Trade Commission and Justice Department. Under federal law — the Hart-Scott-Rodino Antitrust Improvements Act of 1976 — parties to mergers, acquisitions and other transactions valued at more than $84 million need approval from the two federal government agencies, Mr. Weidhaas said. Both are charged with determining whether there is an overlap in the businesses and whether the deals would be anti-competitive.
Approvals in the form of early determinations had been taking 10 to 14 days to receive, but now deals are more likely put off for 30 days — the legal limit defined by the law — due to staffing issues, Mr. Weidhaas said. What's more, should the shutdown last 30 days or more, it is possible that skeleton staffs at both agencies could require a second request for information that could cause even further delays because it gives them more time — as long as two months — to make a determination, Mr. Weidhaas said.
The shutdown comes at a time when debt for deals is less certain, causing private equity buyers to "drag their feet" and ensure financing is in place before finalizing a deal, he said. This was not the case six months ago, when private equity firms were so "highly confident" of getting financing, they would agree to acquire the company with equity from their funds and put the debt in place after the deal closed, Mr. Weidhaas said.
Another source of delay is the IRS, where staffing issues are translating into an interruption in obtaining tax identification numbers needed to open bank accounts, according to sources who declined to be identified.
"This can delay a deal where the timing between signing and closing is very tight," said a source at a large private equity firm.
A prolonged government shutdown could clearly impact private equity mergers and acquisitions that need regulatory approvals to issue securities as well as antitrust and other matters, said David Fann, New York-based president and CEO of private equity consulting firm TorreyCove Capital Partners LLC.
"Most buyers and sellers are already anxious and eager to get their deal done on a negotiated timeline, as the overall market and business prospects can change quickly," Mr. Fann said. "A prolonged shutdown would jeopardize many private equity transactions and, at the very least, cause the negotiation of amendments to purchase agreements."
Delays in closing deals can cause the parties to renegotiate the terms of the transactions, amending the deal.
The longer the shutdown persists, the greater the odds that some private equity deals "will fall apart," Mr. Fann said.
Approvals taking longer
Private equity mergers and acquisitions that require government approval are taking longer, and the volume of private equity-backed IPO registration in the current quarter is also slowing, said Laurence G. Allen, Rye Brook, N.Y.-based managing member and CEO of NYPPEX, a secondary market brokerage firm.
Because the shutdown has slowed government response times, "we expect a further slowdown in IPO volume" in the first quarter, Mr. Allen said.
The longer the government shutdown, the greater the impact on private equity, said Heidi Mayon, Redwood City, Calif.-based partner in the technology and life sciences group of Goodwin Procter. "As of now, the SEC is not reviewing any (IPO) filings."
When the government is back in business, "there will be an unnatural rhythm to the IPO market" because of the backlog of companies that filed right before and others that had filed during the shutdown.
"When the SEC reopens, it will not add personnel to clear the backlog," Ms. Mayon said.
Private equity executives and others had been very optimistic about what the IPO market would look like in 2019, Ms. Mayon said. But the markets were choppy in December and "people crossed their fingers," she said.
If there is a prolonged market downturn this year and the shutdown lasts longer, venture capital and other managers with unicorn investments could lose their shot at an IPO, she said.
Private equity managers could have a company that would have launched an IPO in the normal time frame be pushed back a month or two due to the shutdown, resulting in the company's inability to go public, Ms. Mayon said.