Listing just what doctors ordered
As Australian investors continue to pour back into equities, sharemarket listings are on the comeback trail, giving private equity operators a possible exit plan for a lengthening queue of businesses they have been forced to sit on or flip to each other.
The first big cab off the rank is Quadrant Private Equity's Virtus Health, a $500 million-plus assisted reproductive services provider, which, according
to the prospectus, is responsible for 35 per cent of all IVF cycles performed in Australia. It is a doctor-owner model set to list on the ASX on June 11, with up to 54 million shares offered for sale at between $4.92 and $5.68 from May 27.
It is the biggest initial public offering this market has seen for a while - raising between $264 million and $291 million in cash, putting it on a market cap of up to $450 million - as well as being spawned out of private equity, and will be watched keenly.
From a private equity point of view it will be scrutinised to ensure investors don't get burnt after several assets floated by private equity players in the past few years have not met expectations.
These include Myer, Pacific Brands and fast-food restaurant owner Collins Foods, which was floated by Pacific Equity Partners in August 2011 at $2.50 and soon after lost a quarter of its value in one day when it downgraded its prospectus forecasts from $10.3 million to $8 million. It last traded at $1.79, but at one stage fell below $1, putting a further dent in the reputation of private equity.
Myer, which was sold by TPG in November 2009, has never traded above the offer price of $4.10. It closed on Thursday at $2.91, leaving shareholders with a bad taste, particularly given the seller went away with a bag of cash. Pacific Brands is a similar tale of woe, raising $1.26 billion when it listed in 2004 at $2.50 a share. It last traded at 83¢.
While there have been some successful private equity asset floats and trade sales, it is the failures that stick in the mind.
For this reason, it will be an important test case for other potential floats.
In Virtus' case, Quadrant holds 46.5 per cent in the company, with the rest held by scientists and doctors. The prospectus suggests Quadrant will sell down its stake to 10 per cent or less, depending on demand, with specialists and doctors keeping up to 25 per cent after the float.
To try to allay concerns associated with private equity IPOs, the revenue and earnings profiles of the company are not overly bullish, with revenue forecast to rise to $184 million in 2013, from a previous $171 million, and jump to $206 million in 2014. The company posted a profit of $44 million in 2012, with a forecast rise to $54 million next year.
With the country obsessed with yield stocks, the company forecasts a dividend payment in 2014, putting it on a yield of 4.6 per cent to 5.2 per cent, depending on the final issue price.
From a debt perspective, net debt to earnings before interest, tax, depreciation and amortisation is forecast to be a comfortable 2.3 times.
But while listed health stocks including Ramsay Health Care and Primary Health Care are performing well, an IVF company is new to the listed space and carries risks, given subsidies or partial reimbursements to patients from the government are generous. "If the level of reimbursement provided by these programs for Virtus' services were to change, Virtus' patients may face higher out-of-pocket expenses for assisted reproductive services. This may cause Virtus to experience reduced demand for its range of services, potentially leading to a reduction in Virtus' revenue and profitability," the prospectus states.
Government cuts to reimbursements could come as early as the federal budget next Tuesday or if there is a change in government in September.
Private equity funds tend to keep hold of assets for five to seven years, tarting them up then offloading them in a trade sale or initial public offering.
However, since the GFC it has become extremely difficult to exit assets, leaving many to keep hold of them or flip them to other private equity funds, a practice known as secondary deals.
In Europe, private equity groups have resorted to buying and selling assets between each other rather than selling to third parties or listing them on the sharemarket. There have been instances were an asset has been flipped three times between private equity players, a practice known as tertiary deals.
But with the revival of global sharemarkets, private equity is bouncing back, along with IPOs. In January, for the first time since the GFC devastated retirement savings, super funds returned to their pre-crisis levels, helped by a 14 per cent increase in the sharemarket over the past year.
In the past six months the S&P/ASX 200 Index has risen 15 per cent, mirroring a surge in global sharemarkets as the "rotation" from bonds to equities gathers pace. A lot of tea leaves will be read on Virtus' listing date.