While private equity takeover offers were a major issue for company boards in recent years, it is private equity exits, through IPOs which are of more relevance of share market investors. In January 2006, Crikey questioned the notion of buying private equity floats, suggesting to “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.”
Buying shares in a private equity float is similar to purchasing property “off-the-plan” from a professional developer — that is, the vendor makes their livelihood from selling the asset you are buying. Usually, it is a pretty decent livelihood. Therefore, in the ordinary course of things, the asset you are buying is going to be fully priced or very close to it. Occasionally, private equity floats will prove to be bargains (most notably, JB Hi Fi), but that is usually when the vendor has underestimated the sector, rather than where the business sits in its growth cycle.
This is evidenced by the returns achieved on private equity floats in the past six years:
|Company||Market Capitalisation at Float (approx)||Current Market Capitalisation||Percentage return since float|
|Pacific Brands||$1250 million||$85 million||Down 93 percent|
|Repco||$442 million||$13 million||Down 97 percent|
|JB Hi Fi||$184 million*||$1119 million||Up 508 percent|
|InvoCare||$173 million||$485 million||Up 180 percent|
|Vision Group||$142 million||$32 million||Down 77 percent|
|Bradken||$245 million||$165 million||Down 33 percent|
|Just Group||$428 million||$638 million||Up 49 percent^|
|Emeco||$1135 million||$208 million||Down 82 percent|
|Boart Longyear||$2777 million||$101 million||Down 96 percent|
|Average PE Float Return (in actual $)||Down 58 percent|
|All Ordinaries Return since January 2003||Up 5.5 percent|
* Based on price paid by institutional investors
^ Based on takeover price paid by Premier Investments in 2008
Since 2003, the All Ordinaries Index has risen by approximately 5.5%, clearly outstripping the 58% fall in market value of companies floated by private equity firms.
JB Hi-Fi, InvoCare and Just Group proved excellent investments, exceeding the benchmark significantly, JB Hi-Fi benefiting from the consumer electronics boom, rising Australian dollar (until recently) and influx of Chinese imports. InvoCare has been a genuine success story, while Just Group shareholders benefited from Premier’s takeover last year, shortly before the global financial crisis took hold.
However, the majority of private equity floats of recent years have been disastrous for shareholders. Investors in Pacific Brands, which garnered much attention in recent weeks for its plans to lay off 1800 Australian workers, have lost 93% of their holding. Former owners, CVC, Catalyst and former Pac Brands CEO, Paul Moore, made several hundred million dollars from their investment before floating the company in 2004.
Emeco, Repco and Boart Longyear have provided terrible returns for shareholders. Emeco and Boart were vended with impeccable timing, shortly before the commodities boom drew to a close and have since fallen 82% and 96% respectively.
As Crikey noted back in 2006 in relation to Pacific Brand’s 2004 IPO:
A private equity company’s sole aim is almost always to maximise the value of their investment — raising capital is merely consequential. In fact, the PacBrands float was only about CVC realising its investment. The PacBrands prospectus noted that “the total gross proceeds of the offer [of] $1.22 billion… less an amount to cover the costs of the Offer, will be received by [CVC]… The Company will not retain any of the proceeds of the Offer, other than an amount to cover the costs.”
Apart from generally being exceptional business people, as the owner and manager of PacBrands, CVC would have had a detailed understanding of the business and its growth prospects. If CVC felt it was time to sell its holding in a public float, the chances are PacBrands growth prospects were limited (this has been borne out by the recent profit warning).
The sharemarket collapse and compressed earnings multiples have poured cold water on private equity floats for now. However, in the years to come, PE firms will be looking to exit their investments in large businesses such as Myer, Rebel Sport and Coates Hire (as well as media companies like Seven and Consolidated Media).
When that time comes, retail and institutional investors will no doubt be mindful of their previous PE experiences and recall that buying into a private equity float is like buying an asset from Kerry Packer — probably not a good idea.