Tempting offers: Australian IPOs

When Virtus Health, an in-vitro fertilization (IVF) business backed by Quadrant Private Equity, listed on the Australian Securities Exchange last June, it came as a breath of fresh air to PE investors. The market had responded well, with the offering generating proceeds of A$346 million ($303 million) and the stock closing up 9% at A$6.20 on its first day of trading. Today Virtus trades at around $8.38 a share.

This was the largest PE-backed IPO since the 2009, when TPG Capital-owned department store Myer Holdings disappointed investors by dropping as much as 9% on debut. The float precipitated dearth in public exits in Australia with just 10 PE-backed IPOs taking place between 2010 and 2012, raising a collective $828 million, according to AVCJ Research.

But 2013 was a different story. In addition to Virtus, online foreign exchange and payments provider Oz Forex - which was backed by The Carlyle Group, Accel Partners and Macquarie Group - also performed well, gaining 29.5% on its issue price on the first day of trading. Meanwhile, analytics firm Veda Group - a Pacific Equity Partners (PEP) portfolio company - jumped more than 42% following a A$341 million IPO in December.

So is faith in Australian private equity IPOs gradually being restored and, if so, can it be sustained?

"Virtus was one of the deals that helped kick off the IPO market again," says Marcus Darville, a director at Quadrant. "I think it was a combination of the fact it was a healthcare business and so had good growth opportunities and then there was also a lot of demand because it was an unusual business. Demand was something like eight times covered."

According to a report issued by Deloitte in mid-December, 2013 was the biggest year for Australian IPOs - PE-backed or otherwise - since the global financial crisis with A$7.8 billion raised across 61 offerings. The majority of these were in the second half of the year; December alone saw 23 IPOs raise an estimated A$4.6 billion.

Significantly, around 25% of the total funds raised - or A$2.1 billion - were generated by private equity-backed exits. Compare this to 2012, when 48 IPOs raised just over $1.2 billion. Of these, just three where private-equity backed, accounting for just $156 million.

New demand

There are a number of reasons for this rebound. Firstly, broader macroeconomic factors inevitably come into play - the gradual recovery from the global financial crisis has reduced market volatility and led to a resurgence in confidence among investors, particularly Australia's superannuation funds.

"Australia has the third-largest equity market in Asia capitalized at $1.4 trillion, and flows from the mandatory superannuation retirement savings scheme drive growing demand for equities," David Grayce, a managing director with PEP, told AVCJ in December. "Market valuations are above long-term averages and investors are receptive to IPOs from sponsors."

Another reason for an increase in demand for public equities has been the availability, and renewed interest in, non-mining assets as Australia's resources boom begins to taper out.

The data from Deloitte shows that resource IPOs dominated the IPO landscape in 2012, with nearly 80% of all listings coming from the mining and energy sectors. This began to change last year, with resource listings accounting for just one-third of all IPO activity. Meanwhile, sectors such as real estate, financial services, healthcare, and consumer services have come to the fore.

"With a lot of the new issues in recent years being mining related - either junior mining companies or service companies joining the sector - you have this pent up demand for a new flavor of product, anything other than mining," explains Tim Martin, a partner with Crescent Capital Partners.

Healthcare and financial services in particular have emerged as lucrative territory for private equity. Of the six financial services IPOs to raise more than A$10 million in 2013, three were PE-backed: OzForex, Veda Group and Crescent Capital investee Cover-More Group. The first two have since performed strongly in secondaries market. Financial services offerings as a whole contributed 25% of all funds raised.

Of the five healthcare IPOs to take place, two were private equity-backed: Virtus and Life Healthcare Group, the latter backed by Crescent Capital and Macquarie and had raised A$76.6 million. The healthcare sector accounted for 5.8% of total IPO funds raised.

December doubt

However, not all PE-backed offerings in 2013 have been unqualified successes. The flurry of IPOs that took place at the end of the year yielded mixed results.

Nine Entertainment - the Australian television network saved from receivership when leading creditors Oaktree Capital Group and Apollo Global Management negotiated a debt-for-equity swap - disappointed on its first day of trading in early December. The stock opened at A$2.02, marginally below its IPO price of A$2.05, before closing down at A$2.00. It has since recovered to A$2.15.

Cover-More opened on December 18 at A$1.75, 12.5% below its offering price of A$2 a share and it has yet to recover. Around the same time Dick Smith, the electronics retailer backed by Anchorage Capital Partners, closed flat at A$2.20 and continues to hover just above its offering price.

Regardless, some observers feel this may not have necessarily have a negative impact on the prospects for the IPO pipeline in the coming year. Crescent Capital's Martin, for example, notes that companies which went public last month have not gone through a reporting cycle.

"Compared to how it has been in the last several years there is more momentum and confidence," he explains. "There will be patches where people run out of steam and we almost saw that in the run up to Christmas where so much happened so quickly and people needed a month off to catch up, but I expect the next few months will see a pretty healthy IPO pipeline."

His evaluation is echoed in the Deloitte report, which sees the IPO window remaining open well into 2014. This is driven by the backlog of companies whose listing options in previous years have been limited and given strong and ongoing institutional and retail investor demand.

Indeed, a number of private equity IPOs are already in the pipeline for the coming months. Among them are PEP-owned facilities management firm Spotless Group, Macquarie-owned educational software firm 3P learning, and Healthscope, Australia's second biggest private hospital operator, which is owned by KKR and TPG Capital and could raise as much a A$4 billion.

Just this week it emerged that CHAMP Ventures is looking to float its 42% stake in vehicle leasing and fleet management business SG Fleet Holdings.

Beyond increased investor appetite for IPOs, Quadrant's Darville expresses the hope that as memories of the lackluster post-global financial crisis period fades, private equity will be seen as a natural supplier of companies to the public markets.

The thesis is that institutional investors will then begin to differentiate between GPs based on track record. A higher valuation would be awarded to an IPO backed by a GP with a reputation for building strong companies and hitting earnings targets than an offering from a one-off issuer.

"That is the next level of sophistication," Darville says. "First they must realize that private equity is not all bad and they can make money and after that it is about knowing who the high-quality repeat issuers are."

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• Topics
• Exits
• Australasia
• Buyout
• IPO
• Exit
• Australia
• Quadrant Private Equity
• Pacific Equity Partners
• Crescent Capital Partners