Mar 13, 2009

The risky business of private equity floats

The majority of private equity floats of recent years have been disastrous for shareholders, writes Adam Schwab.

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 developerĀ — 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.

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