The still-shaky market for IPOs may prompt smaller U.S. companies to remain private, opting to raise capital from private equity funds and other types of investors rather than the public.

While the IPO market has picked up from a dismal 2008, shares of many newly-minted public companies haven't performed well. Some have slipped below their initial offering price, a dynamic that discourages other companies considering public offerings from listing their shares.

The unstable market for IPOs could drive smaller firms boasting revenue, profits and growth to shy away from the stock market. Instead, those companies may look to raise capital from private equity firms, according to participants of a mergers-and-acquisitions panel at the Ernst & Young Strategic Growth Forum in Palm Springs on Wednesday.

"There are about 5,000 companies that have the ability to go public, but many of them won't head for the gates," said James Montgomery, chief executive of private equity firm Montgomery Group LLC. "These smaller deals have been supplanted by private equity and growth stage capital."

For example, MobiTV Inc., an Emeryville, Calif.-based company that makes technology to send television to mobile devices, is no longer pursuing an IPO, according to a person close to the company. Rather, it's looking for alternative funding, including private equity, to finance its expansion into Europe.

The continued weakness of the IPO market comes amid a pickup in private equity deals as the availability of credit slowly improves. While few observers see private equity deals reaching the roaring levels they did earlier this decade, a host of recent transactions underscore improvement in the market.

Earlier this month, private equity firms General Atlantic LLC and Kohlberg Kravis Roberts & Co. agreed to buy Northrop Grumman Corp.'s (NOC) TASC consulting unit for $1.65 billion. The buyers were able to raise about half the purchase price in debt.

The growing availability of credit has also prompted some smaller companies that are generating revenue to look to debt--rather than equity--when they consider their funding options, said Richard Casey, CEO of Square 1 Bank. That marks a turnaround from a year or so ago, when credit markets were closed.

"It's a great time to use debt," Casey said. "It's interesting how the market is moving in this direction."

While the IPO market--traditionally the place where many smaller companies look to raise capital and establish their credibility--has picked up, many issues struggle once they've been launched. That discourages both the issuing companies--many of which pay their employees with shares--and investors, who see the value of their purchases fade.

Last week, Chinese printing equipment maker Duoyuan Printing Inc. (DYP) closed below its IPO price of $8.50, while produce giant Dole Food Co. (DOLE) and railroad operator RailAmerica Inc. (RA) also fell from their initial offering prices.

The failure of much of the recent crop of IPOs to maintain their value is affecting the decision of other companies that might consider going public, officials from stock exchanges say.

"When we have deals that break issue [price] and don't perform well, it affects your mentality," said Scott Cutler, executive vice president of global listings for NYSE Euronext. "The ability to tap capital markets, for a lot of growth-stage companies, still is a lot more limited than it was."

-By Ben Charny, Dow Jones Newswires; 415-765-8230; ben.charny@dowjones.com

(Lynn Cowan contributed to this report.)
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