Leveraged IPOs: The Deluge

Next year could be another banner year for IPOs, thanks to all the private-equity-backed corporate buyouts. But ordinary investors may want to stay clear when these deals hit the tape.

With buyout firms snapping up public companies at a record clip this year, expect many of those same savvy buyers to begin looking for a way to take a quick profit and throw their debt-laden acquisitions back into the marketplace. That's especially so if the private-equity crowd begins sensing the mergers-and-acquisition party is coming to an end.

One of the easiest ways for buyout artists to cash in their chips and generate returns is through an initial public offering. Yet IPOs backed by cash-rich private-equity firms tend to be clunkers, faring far worse than traditional new stock offerings. This year, the average gain for an IPO of company owned by buyout firms is just 1%, compared to a healthy 30% return for all other U.S. company IPOs, says Thomson Financial. (Admittedly, the outsize gains posted by MasterCard (MA Quote) and Nymex (NMX Quote) have juiced those returns.)

Some of the IPO dogs churned out by the buyout crowd include drug manufacturer Warner Chilcott(WCRX Quote), down 9% from its offering price, Magellan Midstream (MGG Quote), also off 9%, and mattress company Sealy(ZZ Quote), down 7%. Rental-car giant Hertz(HTZ Quote), one of the year's biggest IPOs, is up 4%, but that's only after the private-equity firms that own the company had to price shares below the anticipated range.