Here's a riddle: What was scorching hot last winter but is growing icy as summer approaches?

Answer: The IPO market.

The fourth quarter of 2004 saw a fantastic 80 new issues worth $15.5 billion go public. The average value for an IPO during this period was just less than $200 million, capping off the best year for IPOs since the late 1990s.

That momentum slowed in the first quarter of 2005, however, as a choppy market enabled only half as many companies to see daylight. And despite the average IPO rising in value to $250 million due to mammoth offerings from the likes of

PanAmSat

(PA)

,

Huntsman

(HUN) - Get Report

and

Celanese Corp.

(CE) - Get Report

, the total value for the quarter dropped more than 35% to $10 billion.

The disappointing trend looks to continue through the second quarter. Less than 20 IPOs have been priced through April and May, so the idea of matching or beating the previous quarter's total is nearly out of the question.

And the IPOs priced in the past two months have done a lot to sour investor demand for new issues. Nearly half are trading below their initial offering prices, including a pair of high-profile companies,

Warner Music Group

(WMG) - Get Report

and investment bank

Lazard

(LAZ) - Get Report

, that saw their shares plummet in the first day of trading.

"Two thousand five has not been a banner year for IPO after-market performance," says David Menlow, president of IPOfinancial.com. "Two thousand four saw a far stronger crop of IPOs come to market at far better values."

Private Equity Problems

Much of the recent chill in the IPO market can be attributed to investor skepticism over companies being prematurely brought public by private equity investors looking for a quick score.

The Warner Music deal, for example, arrived roughly a year after the company was scooped up from

Time Warner

(TWX)

by a group of private-equity investors that included Edgar Bronfman Jr., former

Vivendi Universal

(V) - Get Report

vice chairman, and investment firm Thomas H. Lee Partners.

After underwriters

spent months planning to get $22 to $24 for the stock, Warner wound up being priced at $17 per share, raising $550 million for the company. But aside from taking a haircut on the price, the company also drew jeers on Wall Street because the IPO funds were targeted toward paying down debt related to the acquisition. On top of that, significant dividend payments were made to Warner Music's financial sponsors and executives before and after the IPO.

"The Warner Music Deal may have been the straw that broke the camel's back," says Linda Killian, portfolio manager for

(IPOSX)

the IPO Plus Aftermarket fund, a mutual fund that invests primarily in new issues. "People are definitely on to that game."

That much was revealed when

Boise Cascade

, a company looking to reenter the public markets with the backing of private equity dollars, was forced in late May to abandon its IPO. Investors turned on Boise after word traveled that the company's first duty after going public was to pay off insiders.

Despite the recent poor image, private equity investors are not always harmful to a company eventually looking to tap the public markets, says Menlow. "If they are in it for the long haul, then they can help turn around a company. But if their main goal is to load a previously inefficient company up with debt and then go public, then the company usually ends up in worse shape than it was in before it went public."

Second-Half IPOs

Investors may have closed the gates on IPOs backed by private equity firms looking for a quick flip, but Killian says deal flow has not stopped altogether, especially in the hot specialty retail sector and in energy names.

Among the retail companies on deck this year are

Golf Galaxy

and

Anna's Linen Company

. And Killian says high oil prices should boost demand for oil services equipment provider

Dresser's

shares when the company goes public later this year. Morgan Stanley is slated to be lead underwriter for Dresser's proposed $575 million offering.

Killian will also be on the lookout for the second public appearance of Internet retailer

Buy.com

. Founded in 1997, the discount retailer saw its stock price skyrocket and crash before founder Scott Blum returned to take the company private in 2001.

Killian also knows a thing or two about coming back after the bubble's collapse. Killian and her partners started their fund during the Internet boom, when hot Internet offerings often doubled or tripled on their first day of trading. In 1999, the fund returned a mind-blowing 115%.

Unfortunately for Killian and her shareholders, those returns burst along with the tech bubble. After peaking in 1999 with more than $200 million in assets, the fund lost money when IPO action dropped dramatically. The fund lost 42%, 52% and 22% in consecutive years. By last year, it was down to less than $20 million in assets.

The fund broke its string of losses in 2003, when the markets finally rebounded and optimism returned. The fund rose 52% in 2003, handily beating the

S&P 500

return of 28.7%. In 2004, the IPO Plus Aftermarket fund gained 13.1%, beating the broad index by more than 2 percentage points. So far this year, the poor sentiment and tepid demand for IPOs has pushed the fund down 7.58%.

Killian says public demand is less hot for biotech companies whose offerings are beginning to back up like planes on a runway -- once again due to the greed of private equity investors.

"There are still a lot of biotechs in the pipeline, but most of those deals won't get done because they are too early-stage," says Killian. "Public investors won't shoulder the risk that should be shouldered by the private equity investors."