In the financial world, "contagion" is a Wall Street term that describes marketwide selling in one region of the world, for example in Tokyo or Berlin, that leads to selling in another region of the world, for example, in New York.
But contagion can take place within a market (or intramarket) as well, and that appears to be the case with private equity firm Kohlberg Kravis Roberts (KKR) and its initial public offering.
A repricing of risk sparked by renewed concerns regarding subprime mortgage defaults, as well as a moderate stance regarding the deployment of new capital, has produced more-conservative capital market conditions -- conditions that may prompt KKR to postpone its IPO.
KKR filed to go public on July 3 and planned to raise $1.25 billion. KKR had sought to follow in private equity firm Blackstone's (NYSE: BX) footsteps: in June Blackstone priced 133.33 million shares at $31 in a $4.13 billion IPO. BX's shares have since slipped to around the $26 mark.
More importantly, a new conservative tone has gripped the debt markets, and that mood has spilled into the initial stage equity market -- conditions that will make it harder for KKR to attract an adequate price for its shares, and quite possibly, prevent the company from moving forward with the IPO at this time.
For the typical investor, the IPO market, can, at times, appear to be somewhat opaque, but it is roughly analogous to this: the IPO market is like a scheduled art auction for a painting or sculpture. If an auctioner believes there will be strong demand for the painting or sculpture, he or she may choose to hold the auction, hoping that well-heeled potential buyers will bid-up the price of the artwork. If he or she senses low demand, the auctioner may take the artwork for the docket, for fear of receiving an inadequate price. Likewise with the IPO market: a company going public is seeking the highest price possible for its "artwork" -- its common stock; but if it senses low demand, in this case from financial institutions and other potential stock buyers, it may choose to postpone the IPO, to wait for a day when market demand may generate a higher price for its shares.
As of Friday afternoon, the initial, emerging consensus in Wall Street circles was that the negatives of KKR's going public outweighed the positives at this time.
"They should absolutely, unequivocally withdraw the IPO," said David Menlow, president of research firm IPOfinancial.com, told Reuters.
However, while one can sense that there has been a shift in investor sentiment regarding both the credit and equity markets, it's important to note that the recent selling in the financial markets represents just one data point: Wall Street's lead managers and syndicate parties, among others, will need a few more data points before substantially altering their schedules.
Closing Bell: Dubai sends jitters throughout the market (S, BBY)
Heinz looking good after the second quarter?
Why isn't Bank of America updating its shareholders on CEO situation?
