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KKR Should Delay IPO Because of Credit Jitters, Analysts Say


Kohlberg Kravis Roberts, the private equity firm planning to go public, should yank its IPO from the market, according to analysts, who say declining credit markets make it tough for a leveraged buyout firm to bring an offering to market.

The credit spigot that fed the borrowing frenzy by private equity deal makers has essentially been turned off for now, as investors put the brakes on purchasing debt from buyout financings with heavy leverage and loose lending terms.

That pullback has cast a chill across the private equity sector, causing delays in the major leveraged buyout financings of automaker Chrysler and retailer Alliance Boots. The financing delays and sell-off in private equity stocks leave KKR facing a tough climate.

"They should absolutely, unequivocally, withdraw the IPO," said David Menlow, president of research firm IPOfinancial.com.

Even more troubling for KKR could be the reported discount in valuation aimed at KKR rival, Apollo Management, which is also planning to take part of itself public.

KKR declined to comment.

"The demand might have been there a couple of months ago, but it evaporated," said Francis Gaskins, president of research firm IPODesktop.com. "KKR missed their window."

In response to a question about whether he thinks KKR should withdraw the IPO, Gaskins said: "Yes, I do."

The credit market pullback has not only affected leveraged buyouts, it has prompted a broad decline in the equity and debt markets and taken its toll on publicly traded private equity firms.

The shares of KKR rival Blackstone Group , which went public late last month, are down 21 percent since July 9. Fortress Investment Group, also a publicly traded buyout firm, has seen its stock fall 16 percent during that period, with both stocks taking big hits in the last few days.

Another challenge: Apollo is proposing to sell unregistered shares to investors at a valuation of around 10 times its expected 2008 earnings, according to a Financial Times article on Wednesday. That is a significant discount to the roughly 20 times earnings Blackstone priced into its offering.

"Unless Fortress and Blackstone can show that they have some strength, and that maybe this was just a lot of stock to hit the market at one time," then KKR will be forced to delay the offering, said Menlow of IPOFinancial.com.

"Let's say KKR's IPO can only work if there's a 20 percent haircut, then maybe Henry (Kravis) and George (Roberts) say 'we're not letting the company go for that cheap of a price."'

A combination of market conditions and unrealistic expectations should prompt KKR to pull the offering, he added.

KKR filed to go public on July 3, at a time when private equity firms are seeking public money to diversify, help recruit and retain talent and to help grow and institutionalize the business. KKR plans to raise $1.25 billion from the offering, only a small sliver of the global buyout firm, which as $53 billion under management.

Typically, companies go public around 90 days after the S-1 filing. The timing of KKR's projected debut coincides with around the time when bankers and investors are hoping some $200 billion of leveraged buyout debt squeezes through the market. If the market absorbs the debt, then KKR's timing could be perfect.

But credit market conditions have tightened so dramatically in just the last few days alone, that several private equity executives and bankers say the bottleneck of debt coming in September will not pass through easily.

"The party is ending and I think KKR should pull its IPO -- no doubt Henry Kravis is savoring (Blackstone's) Steve Schwarzman's busted IPO with a fine claret," Peter Cohan, president of consulting and venture capital firm Peter S. Cohan, wrote in a recent blog. "And I doubt he'd like to return the favor by having his IPO go bust."