Australia IPOs: Best behavior

The last private equity-backed IPO in Australia that raised more than $100 million started trading nearly three years ago. In 2018 alone, financial sponsors agreed six transactions – each worth at least $100 million – that saw companies delisted from the domestic stock exchange. While public market investors seem happy selling to private equity firms, they are evidently not as comfortable buying from them.

Two high-profile companies – from opposite ends of the corporate development spectrum – are now tasked with turning around this perception problem. Two weeks ago, consumer lending business Latitude Financial, which GE Capital sold to KKR, Värde Partners and Deutsche Bank for A$8.2 billion ($5.5 billion) four years ago, announced plans to raise up to A$1.4 billion. It will be joined on the road by PropertyGuru, a 12-year-old online property start-up from Southeast Asia that is looking for A$380.2 million.

Since Bravura Solutions became the last PE-backed company to breach the $100 million threshold in 2016, there have been 16 listings. There is a clear preference for VC-backed new economy business models and modest fundraising targets, with only six of the 16 generating more than $10 million.

With the ASX200 Index up nearly 19% year-to-date, several private equity players express frustration at the market’s willingness to push up the prices of existing stocks but not to support new opportunities. “Interest rates are low, equities prices are high, so there should be a lot of activity, but only e-commerce gets away,” one investor observes, before referring – like many of his peers – to research showing that PE-backed IPOs outperform non-PE backed offerings.

The reality is the market goes in cycles: a strong performer rekindles retail investor interest in private equity-owned companies, a wave of offerings hit the bourse, and then one or two notable failures snuff out the flame. Between 2003 and 2007, 66 IPOs raised a combined $4.6 billion. This dropped to 19 in 2008-2012, with total proceeds of $2.7 billion. They rediscovered the magic in 2013 with $11.9 billion raised from 44 IPOs during a three-year period.

That mini golden age was easy to bookend: Quadrant Private Equity opened the window with the well-received Virtus Health offering; then Dick Smith Electronics abruptly shut it by sliding into bankruptcy within two years of its IPO and just over one year after former owner Anchorage Capital Partners sold the last of its shares. Local media laid into private equity and investor trust in PE-backed offerings largely evaporated. 

Private and public investors need one another – the former wants multiple exit options, the latter wants access to a fresh stock of attractive, growing companies – but they must find a way to rebuild the trust. The right noises are being made around the Latitude and PropertyGuru IPOs about alignment of interests and being a long-term shareholder. Maybe they will be the ones that reopen the window, but will the discipline remain when others start to scramble through it?

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• Topics
• Australasia
• IPO
• GPs
• Australia