Charlie Aitken: PE-backed IPOs redeem themselves

Charlie Aitken, executive director at Bell Potter Securities, says buying shares in private equity-backed initial public offerings may be attractive if a buyout firm retains a stake in the company.

Of 10 private equity-backed IPOs analysed by Mr Aitken, three are currently trading below their IPO price. The most notorious private equity-backed IPO with Australian investors is Myer, in which shares were 49 per cent below the IPO price as of last Friday, according to Mr Aitken. Private equity giant TPG and Blum Strategic Capital got rid of all their shares in Myer in a November 2009 IPO.

“Everyone now points to the Myer experience as a reason ‘never to buy from private equity,’ but analysis of returns from recent private equity IPO’s suggests that approach has cost sceptics serious performance as the majority of private equity IPO’s have performed well to very well in the secondary market,” Mr Aitken writes in his daily research note, Ringing the Bell.

The best performing private equity IPO among the 10 mentioned by Mr Aitken is Pacific Equity Partners’ Veda’s IPO. Bell Potter is a co-manager of Pacific Equity Partners' Spotless IPO which gets underway this month.

Veda’s shares have gained 76 per cent since they listed in December, as of Friday’s close. Pacific Equity did not sell any shares in the IPO and has a 63.5 per cent stake in the business intelligence and credit checking company.

The second-best performing private equity IPO is the Carlyle, Accel and Macquarie-backed OzForex. That stock is up 46 per cent since its listing in October. The third-best performing private equity IPO is Quadrant Capital’s Virtus Health, which has seen shares gain 37 per cent since its listing in June last year.

Shares in the biggest private equity-backed IPO of 2013, Nine Entertainment, are up 12 per cent since a December listing.

“Since 2013 all private equity IPO’s have performed dramatically better, perhaps confirming private equity and their advisors have worked out that they can’t use the equity market as their ‘toilet'," writes Mr Aitken.

"For the PE model to work they need an exit or partial exit plan and the best exit is the equity market. PE needs their exits to perform well to continue (the) cycle of cycling capital."

(Editing by miranda.maxwell@businessspectator.com.au)