It’s somehow comforting that private equity is being forced to go bottom fishing in Australia at the moment. The likes of TPG, Pacific Equity and others seem to sniffing around some of the weak and ailing Australian listed companies: groups such as Billabong, Spotless, Pacific Brands have been approached by private equity buyers. Other companies no doubt are sitting on informal approaches.

The overriding impression of the private equity business is that it isn’t interested (or can’t afford) well-run and performing companies and that it has been forced to go after the serial underperformers (Spotless), or those flailing groups in and around retailing (such as Pacific Brands and Billabong). Mega buys are out: CVC’s silly and death-defying purchase of the Nine Network has put paid to that.

These guys are fearless as they ignore the failed private equity deals of the past year in retailing: flops such as Borders (Pacific Equity) and Colorado (Affinity of Hong Kong). Myer was a “success” for TPG, except for the buying in shareholders who paid $4.10 and have seen the shares go south while TPG’s profits disappeared into sunnier low tax climes.

But how are the deals already done going? We know the failures (above) and some of the successes (Archer Capital selling Rebel Sport to Super Group), but what about those that are still on the books of some of these funds? It’s hard to find out, but thanks to the Wesfarmers recent interim profit report, we have discovered that its a tale of woe and lots of red ink, in fact, losses in the tens of millions of dollars.

In some ways it is comforting that one of our biggest companies, Wesfarmers, has lost a bundle in private equity funds. After all, it’s all in the family, so to speak. The three funds involved were set up by the Sydney-based Gresham investment bank, of which Wesfarmers owns 50%.

In the past 18 months Wesfarmers have lost more than $70 million, and perhaps as much as $100 million on that investment (we don’t know how much they tipped in). While it’s not much compared to the hundreds of millions of dollars made from Coles, Bunnings and other investments, it’s large enough to raise eyebrows, especially when Wesfarmers’ CEO Richard Goyder is listed as a director of the funds and a member of the investment committee.

Gresham Partners Group, the holding company for the investment banking operations runs the funds. The Gresham website says Wesfarmers is an investor in each of the three funds.

The 2011-12 interim report earlier this month shows Wesfarmers’ share of the loss recorded by the Gresham Private Equity Funds was $46 million in the six months to December 31, compared to a loss of $28 million in the first half last year.

“The result is due to downward non-cash revaluations in the portfolio, mainly reflecting a compression of equity market trading multiples in the period,” directors said.

The 2010-11 annual results (released last August) revealed the “Gresham Private Equity Funds recorded a loss of $60 million, compared to a gain of $43 million last year, due to downward non-cash revaluations following a difficult year for some of the funds’ trading businesses and generally lower industry valuation multiples.”  No figure was given for the Wesfarmers’ share of those losses in 2010-11.

But given the latest interim report does give a figure ($46 million) for the losses for the six months to December, it looks like the tide of red ink in the funds has risen.

The reason for the rising losses is the falling share prices of listed companies similar to those Gresham has invested in. Retailing is one of those.

The Gresham funds bought the Witchery women’s fashion-wear chain from Solomon Lew several years ago. It also owns the New Zealand consumer electricals retailer Noel Leeming. The funds also have investments in tourism including the Bay of Fires and Cradle Mountain Huts Walk in Tasmania and Wilpena Pound resort in South Australia. They also own Silk logistics, a transport group.

There’s a rather grim irony here for Wesfarmers’ shareholders: the losses involve investments in retailing. You would have thought with the experience in Coles and Bunnings, Wesfarmers and CEO Richard Goyder might know something about investing in the sector and its pitfalls and what to do to fix up any problems. But clearly not.

Peter Fray

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