Managers at private equity houses and hedge funds have discovered they can receive windfalls before their companies float and so hedge against potential losses post-IPO, reports the Wall Street Journal.
By borrowing large amounts of cash from investment banks ahead of the flotation, they can pay large dividends to major stakeholders in the firm, and then pay the loan down using IPO proceeds, management fees or similar.
This process affords an early chance to realise some cash from their equity holding in the company. People familiar with the matter told the Journal that executives at Apollo Management are seeking such a dividend ahead of a 10% stake sale and potential IPO later this year. The figure involved is $1bn and Apollo’s bankers at JPMorgan are trying to drum up further support on Wall Street.
Fortress sought a $750m loan ahead of its IPO last year and Blackstone, which is also heading for a float, is looking into a dividend as well,said the Journal citing people familiar with the matter.
The fact that banks are prepared to lend the cash for these dividends – even though the IPO is not a done deal at that stage – demonstrates how the influence of private money managers is rising on Wall Street, where banking fees are derived more and more from hedge funds and private equity funds. The securities houses are willing to lend the cash in the expectation of attracting attractive underwriting business later on.
Obviously there’s a downside: the extra debt can weigh on the float price and if the float doesn’t happen at all, then the loans will have to be repaid from other sources.