Last month Crikey published a piece by Adam Schwab discussing Pacific
Brands’ underperformance as a listed company, and concluded with the
general advice: “never invest in a company being floated by a private
equity firm, because only one person will make any money, and it
probably won’t be you.”
This comment struck me as a little naive – while there is no question
that Pacific Brands has been disappointing, I was immediately able to
think of a number of private equity floats that had done exceptionally
well in the aftermarket. JB Hi-Fi and Invocare were just two that
spring to mind.
Subsequently, I have performed a full analysis of the 72 floats of more
than $100 million to take place since 2001, with a view to
assessing whether private equity floats really do underperform relative
to other IPOs.
After narrowing down the list of floats to exclude companies that had
been listed less than 12 months together with non-comparables such as
investment companies, property trusts and resources companies, I was
left with just 19 IPOs, of which 7 were companies that had previously
been owned by private equity. The seven were Pacific Brands, Repco,
Just Group, Vision Group, Bradken, JB Hi-Fi, and Invocare.
Of the seven, four (Invocare, JB Hi-Fi, Vision Group, Bradken)
delivered capital appreciation of 100% or better in their first two
years as listed entities (or,in the case of companies that have not
been listed for a full two years, to date). Only four IPOs from the
list of 19 had outperformed this group.
However, it is also true that three of the seven significant private
equity floats have been disappointing for IPO investors, particularly
in the context of the strong performance achieved by the broader market
in recent years.
The challenge for investors considering the merits of any private
equity float is to identify whether it is amongst the group of
companies that will flourish in a listed environment, or whether the
company’s destiny is instead to struggle to find continued profit
growth and opportunities for value creation.
Any Crikey reader who is interested in reviewing my full analysis of
the performance of Private Equity floats should email a request for
this week’s Member Insight newsletter to [email protected].