A pooled fund floats

One of the more unusual floats kicked off yesterday, with Austock Group releasing its prospectus. The float is novel for both its structure and its size, or lack of it.

That novelty lies in the fact that Austock is a pooled development fund (PDF), which means both the income and capital gains it may generate will be tax-free in the hands of shareholders. Within the company, income is taxed at only 15 per cent and capital gains at 25 per cent, rather the corporate tax rate of 30 per cent.

The group, which has specialised in listing and advising smaller companies, was registered as a PDF in 1999, two years after legislation designed to encourage investment in smaller and faster-growing Australian companies – those with total assets of less than $50 million – was introduced. There are a lot of restrictions around what PDFs can and can't do, including minimum percentage levels of investment in individual companies and a prohibition on borrowings.

Austock has used the PDF regime (which closed to new entrants in June) to create a raft of specialised businesses – corporate advisory, broking, property investment, life insurance, asset management, private equity and the Australian Property Exchange – below an ungeared holding company. As a corporate structure it appears unwieldy and inflexible but, for shareholders, extremely tax-efficient.

PDFs have generally been investment companies targeting high-risk, high-return segments like bio-tech. The use of the PDF scheme to build a financial services group – Austock is an investment bank which will have a market capitalisation of more than $200 million – is ingenious. To have remained approved for as long as it has been Austock would have needed its strategy and structure to be sanctioned by the PDF Board.

Austock has had a history of being innovative, having created the first exempt markets for shares and property securities and the platform for the recently-established Australian Climate Exchange. It perhaps isn't surprising that it would apply its creativity to its own structuring.

The other odd aspect of the float is how small the amount of new equity being raised will be. Austock is only going to issue 6 million new shares, to raise net proceeds of $10 million.

There appear to be two reasons for the tiny raising. One is the rationale for floating in the first place and the other is the timing.

Austock is about 57 per cent owned by its staff. Listing will provide a market and market price for that equity and eventual exit gates for the more senior employees, as well as a currency to attract new staff.

The timing issue is curious, because, had Austock held off another year or so, it may have been more valuable – which probably helps explain why the number of shares being issued is so small. The existing shareholders didn't want to risk giving away too much value.

Austock's growth strategy appears to revolve around its funds management businesses, which have about $1.2 billion of assets under management, having trebled in three years

A feature of those funds businesses is the alliance Austock has developed with ABC Learning's Eddie Groves, whom the firm has advised almost from the moment he first emerged. The prospectus cautions investors about the relationship and Austock's dependence on it. The group manages funds that own properties leased to ABC in Australia and New Zealand.

Earlier this year, Austock helped ABC raise $1 billion of equity and hybrid equity to put into a war chest for an acceleration of Groves' assault on the US childcare market. This brought in the Singapore Government-backed Temasek group as a substantial shareholder in ABC.

Austock has a contract to acquire and manage properties in the US on ABC's behalf, collecting a fee for each centre it acquires. The turmoil in US property and debt markets puts some sort of question mark over the rate at which the alliance can expand ABC's presence in the US in the near term, but ABC's record suggests it would have very ambitious plans to scale up in the US.

The relationships with ABC in the US and Temasek and Malaysia's CIMB-GK Securities group could be more valuable in a year or two's time than they are today, which is probably a good enough reason for minimising the size of the float.