Tough times for high-profile IPOs

LONDON (CNNMoney.com) -- Some once high-flying initial public offerings may be grounded as they become a tough sell amid market turmoil.

A number of listing plans are at risk, including those for hedge fund firms Man Group and Och-Ziff Capital Management as well as buyout titan Kohlberg Kravis Roberts (KKR).

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"IPOs are still a luxury item. When investors are worried about the financial strength of their core positions, IPOs do not come into the equation of things that they have to preserve," said David Menlow, president of IPOfinancial.com, an independent research company .

Hedge fund and private equity managers are particularly vulnerable because they rely on borrowed funds, and the current freeze on credit will make them less attractive to investors.

"There's going to be trouble for these firms because their businesses are set up to lever up. As credit dries up, it pinches their operational model," said John McCune, director of research at SNL Financial, a research firm that focuses on the finance industry.

In the current market, investors are taking a cautious view of any financial firm - even those without subprime on their balance sheet, according to Anna Pinedo, a partner in the global capital markets group at law firm Morrison & Foerster.

The focus of roadshows - the presentations companies give to potential investors before an IPO - is getting diverted to subprime, which just "takes on a life of its own," Pinedo said. "It's all people have their mind on."

Some listings have already been affected. Man Group, the world's largest publicly traded hedge fund company, whose shares trade in London, has shelved plans to list its Man Dual Absolute Return fund on the New York Stock Exchange, according to a person familiar to the situation.

There is also speculation that KKR, the infamous buyout firm, will have to postpone the $1.25 billion initial public offering it filed for in July.

"The big news story for the IPO market has to be the growing likelihood that a really high quality offering like KKR might get postponed, if not pulled altogether," Menlow said.

Man Group and KKR both declined to comment, citing SEC "quiet period" rules that prohibit them from publicly discussing information related to their offerings.

Another firm waiting in the wings is hedge fund firm Och-Ziff. While it has so far managed to steer clear of subprime problems, it isn't immune from them.

In an updated prospectus it filed last week, the company said problems in the mortgage finance markets had not "materially impacted" the performance of its funds. But "there can be no assurance that we will not suffer adverse effects from the overall tightening of global credit markets or that we will not suffer materially from other changes in market conditions," it added.

Before the recent credit crunch, financial firms were a big hit in the IPO market. Hedge fund manager Fortress (Charts) posted one of the best first-day performances of the year when it went public in February. Private equity powerhouse Blackstone also made a stellar debut in June.

But the luster surrounding these firms has faded - shares of Blackstone (Charts) fell below their $31 offering price within days of their debut and have never recovered. Fortress has also been in a downward spiral.

The damage done by these deals has been so substantial "it has not only turned retail off but also left a vast number of institutions hopping mad," according to Scott Sweet, senior managing partner at IPO Boutique.

Besides dealing with investor backlash, these financial firms face stiff competition for investor dollars. In the midst of the market turmoil, some companies have pulled off spectacular offerings.

Earlier this month, shares of Silicon Valley software firm VMware (Charts) just about doubled on their first day of trading, earning the company the best one-day performance for an IPO this year.

Hedge funds and private equity firms will most likely have to contend with lower offering prices or wait out the turmoil in the market, analysts say. But if conditions worsen, they may be forced to pull their offerings altogether or explore alternatives such as private placements.