The real story with private equity floats

Following the Dick Smith debacle, many investors might be wondering whether they will be comprehensively done over if they buy shares in a float of a company by private equity.

Judging by recent comments and the collapse of the Dick Smith Group, you would be, but statistics indicate that in the long haul, you would be better off backing private equity (PE) exits than avoiding them.

That’s not just the opinion of the PE industry, but of independent reports looking at the long-term returns on PE floats, including Deloitte’s 2016 IPO report.

What’s the catch? The catch is that the trend went the other way in 2015 and PE floats didn’t do as well as non-PE floats.

The latest report from the Australian Private Equity and Venture Capital Association (AVCAL), IPO performance analysis 2013-2015, said: “PE-backed IPOs in 2015 underperformed non-PE backed IPOs."

The report, a collaboration between AVCAL and Rothschilds, only looked at the bigger IPOs, those with a minimum offer size of $100 million. But it conceded that during the 2015 calendar year, PE exits could only manage a return to investors of around 13.3 per cent, against 19.3 for IPOs that did not involve private equity.

The more independent Deloitte report arrives at a similar conclusion. It noted that the two biggest floats of 2015 were both PE exits, Link Group and MYOB, with the former ending up 17 per cent ahead and the latter down 11 per cent, which couldn't have helped the numbers.

On a weighted average return basis, which gives more weight to the bigger offerings, the numbers were even less exciting at a 9.4 per cent return for PE exits, against 18.9 per cent for the non-PE exits. So 2015 wasn’t a great year for PE exits.

However, PE IPOs have actually outperformed non-PE floats by 15 per cent if you go back to 2013, according to the AVCAL report.

To be specific, PE-backed IPOs have achieved an average overall return of 40.9 per cent since 2013 and a weighted average return of 26.4 per cent, which beats regular floats by around 15 per cent and eight per cent respectively. So, if PE vendors got a name for themselves in 2015 for being too greedy as sellers, that perception isn’t really justified.

The Deloitte report noted the 16 PE exits in 2015 represented 46 per cent of the year’s IPO raisings by market capitalisation.

What’s more, three of them, Appen, BWX and Baby Bunting, turned in some of the best performances of the year, being up 230, 138 and 70 per cent respectively.

So don’t write off PE exits as a legitimate asset subset for retail investors.

The important point, as with all IPOs, is for the investor to look hard at what’s being offered, read all the information available, particularly any independent research and analysis, and make a measured decision.

We can’t undo the past, such as re-assembling the wreckage of Dick Smith, but it’s also worth noting that selling assets is a necessary part of the private equity process, rain or shine, and that’s not going to change.

More broadly, there are few important reasons investors should be considering when buying into IPOs. Portfolio diversification is one of the most important.

There is a good spread across sectors in the ASX’s list of imminent company floats. Health care? Financial technology? Dairy?

They are all represented on the list of upcoming floats or in the pipeline.

A lot of investors are only now becoming painfully aware that a reliance on large capitalisation, high dividend paying stocks such as the big banks and Telstra can cause grief and losses, as we’ve seen over the past 12 months.

A greater exposure to a more varied group of companies, including those listing on the ASX and high-growth small-cap companies, would help to build wealth more effectively over time.

Tim Eisenhauer, managing director, OnMarket BookBuilds

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