Christmas has come early this year to the nation’s deal-starved investment bankers as an avalanche of big-ticket initial public offerings prepares to hit the market in the next six weeks.
But institutional investors are showing less of an appetite for the billions of dollars of equity on offer in forthcoming floats.
“Investors are a little more discerning now than in the heyday of private equity. History shows you should be suspicious,” says one fund manager.
From the private equity partners’ point of view, the recent uptick in equity market confidence has provided a window of opportunity to exit businesses that in some cases have been on the books for years. No one knows how long the window will remain propped open.
Buyout firms are under pressure from their investors to start showing returns ahead of the next round of fundraising. Some of Australia’s largest PE firms, including Pacific Equity Partners, are either currently in the market for new capital or will be in 2014.
Historically, IPOs have not been the most common method of sale for buyout firms, comprising only 10 to 20 per cent of exits, based on data compiled by industry lobby group AVCAL. Trade sales or secondary deals to other buyout firms are the preferred strategies, and have dominated in the subdued environment of the past five years.
The success of the Virtus Health float is credited with priming the market for the current rush of new offerings. It was owned by Quadrant Private Equity, which bought into IVF Australia in 2008 and continued to invest and add businesses. Virtus shares have hit $9 and now hover near $8.80, far above the issue price of $5.68 on June 10.
Fund managers are more concerned about businesses that have only been in private equity hands for a short period – anything less than the traditional three to five year holding period – which stretched out to seven years in the post-GFC market doldrums.
Dick Smith Electronics, sold by Woolworths to Anchorage Capital for $94 million last year, has had a surprisingly brief period of private equity ownership. It faces the common challenges of other bricks-and-mortar retailers competing with online sales, compounded by the rampant deflation in its key categories that means even steady volumes generally produce year-on-year declines in sales revenues.
“If there has been a sudden, underlying recovery in earnings, how has that happened?” asked another portfolio manager.
He also voiced caution on Nine Entertainment, whose prospectus is doing the rounds this week ahead of a December 9 listing that is set to value the broadcaster at up to $2.9 billion after a year in the hands of US hedge funds Oaktree Capital and Apollo Capital Management.
The free-to-air broadcaster will face keen competition from Seven West Media’s plan to launch its first internet TV channel and pay-TV operator Foxtel’s third-generation iQ personal video recorder, which will boost opportunities for internet delivery as viewers’ preferences for TV consumption shift.
About 20 IPOs are planned for coming months, including consumer credit alert company Veda, which is seeking to raise $340 million in October (Veda seeks to raise $340 million in a December IPO, October 24); Crescent Capital’s Life Healthcare business; and Raphael Geminder’s packaging company Pact Group, worth around $1 billion, whose last attempt to float in 2009 was shelved by shaky equity markets.
So far this year, a total of 29 IPOs has already raised $3.9 billion, around ten times the $333 million raised in 2012, according to Dealogic data.
Good-quality businesses with conservative accounts and forecasts will always find a home with investors. But many fund managers are unable to erase the memory the disastrous floats of private-equity owned Myer Holdings in 2009 and fast-food chain owner Collins Foods in 2011, both of which trade far below their issue price despite the broader market’s two-year rally.