How common investors can get in on Private Equity

For yet another year, Private Equity buyouts are expected to set a new record on Wall Street. Although the "rich get richer" theory applies, investors of all levels and experience have seen the benefits of leveraged buyouts. Rumors and announcements of LBOs stemming from Private Equity capital has driven stock prices dramatically higher, making these firms pay more for each acquisition or considered target. Although investors have little control over the situation and some may not want to lose ownership of the company they are part of, these Private Equity deals provide payouts of premiums that more then make up for these feelings.

Private Equity has remained an elitist group over time, with high barriers of entry. Until now. Presently, PE firms either trade sections of their firm publicly or have planned IPOs set to unveil before the end of this fiscal year. If you are looking for an immediate venture into ownership of a PE firm, you can try Fortress Investment Group (FIG), Apollo Group or KKR, the noteworthy firm that recently announced a bid for TXU. Investors with patience may want to wait for IPOs expected from the two most powerful and well-known firms in the PE world, Carlyle Group and Blackstone Group.

To some, it may seem confusing as to the reasoning behind Private Equity firms going public, especially because of their namesake. Thinking critically about how these firms derived their name, they still possess the ability to keep restructure and overhaul acquisitions in private. Disclosures in financial statements are a specific concern to some analysts, but the numbers will never fully display how the firms turnaround or fail with individual acqusitions. In addition, the acquisitions acquired by these financial barrons are likely to benefit because they are allowed to operate like a separate entity without the pressure of growing an artificial number such as a stock price.

Buyer beware though, as this article explains, PE firms stock growth after three years of their IPO is only 39% compared with normal growth of 45% for other companies. Also, as Adam Lashinsky writes, these PE firms are forced to cater to those pesky investors which they try to avoid so adamantly in the process of their business. Another possible red flag of the firms center around the use of stockholder's equity instead of debt. While the practice is generally seen as favorable and may be the case in some of these IPOs, the possibility of maxed-out debt could be extremely detrimental to the overall growth in earnings and health of the firm.

Should Orbitz go public?

Blackstone group, one of the famed private equity firms, recently announced they are taking Orbitz Worldwide Inc. public. This seems like an odd time to do so considering the high level of competition among online travel agencies, price wars between the airlines and rising costs due to elevated fuel prices.

Orbitz reported an increase in bookings of 38% last year, along with revenue of $752 Million. Looking at those numbers, one might be inclined to buy this IPO. However, if you look at the net income, Orbitz claimed a loss of $146 Million. This makes me question how the company derived that $752 Million in revenues; Orbitz makes profit by taking money off the top of flights, hotels, and cars other companies provide. If that revenue amount included the actual total flight, hotel, and rental costs, Orbitz might be cheating itself by going public at this juncture. Perhaps, investors are the ones who will get cheated if they fail to look at these numbers closer.

Even if Orbitz generated that $752M in revenue solely from its commissions, where do these high costs come from that created a net loss of more then 1/7 of these revenues? It makes you wonder if the costs can be cut or controlled, especially once full disclosure of financials is needed. In addition, revenue may slump this summer if fuel prices remain high and are built into plane ticket or car rental prices.

It isn't usually smart to go against Blackstone and underwriters such as Morgan Stanley, Goldman Sachs, and UBS, but I will be searching for more information before I jump on this IPO bandwagon.