Private equity floats on the ASX have done better than many think

Gary Friedman/Los Angeles Times via Getty Images

Most private equity listings have rewarded investors despite the big failures such as the collapse of Dick Smith.

From the start of 2013, private equity IPOs have delivered average gains of more than 33%, according to analysis by Deloitte in its 2017 IPO report.

Private equity backed IPOs accounted for 18.1% of total capital raised in 2016, down from the historical average of 44.6% between 2013 and 2015.

The Dick Smith float was called the greatest private equity heist of all time by Forager Funds Management’s Matt Ryan in a blog post. He said the IPO used “all the tricks in the book, to turn Dick Smith from a $10 million piece of mutton into a $520 million lamb”.

There’s been a significant decline in private equity floats from a peak of $7 billion in 2014, as this chart shows:

Source: Deloitte

“The reduction in the number of IPOs and capital value of PE-sponsored IPOs in 2016 largely reflects the exit of a number of significant investments over the last three years,” says Deloitte.

These include Healthscope, Spotless Group, Link Group and MYOB.

Of the five private equity-backed floats in 2016, the most impressive performance was the 88.5% return on Archer Growth Fund’s MotorCycle Holdings.

This was a contrast to a decline in Scottish Pacific Group’s share price following an earnings downgrade shortly after listing.

“The mixed performance — across all listings and not limited to private equity — has led to some uncertainty as institutional investors become more discerning in their assessment of the quality of listings and assets,” Deloitte says.

“We would expect to see a sharper focus from investors on the track record of earnings of IPO candidates, as well as the sustainability of the earnings estimates beyond simply the prospectus forecasts.”

However, Deloitte says the market appears to be optimistic with a reported pipeline of sizable floats including TPG-backed Alinta Energy, Quadrant Private Equity’s Zip Industries, Navis’ Retail Apparel Group and Archer’s Quick Service Restaurants.

“The key sectors where private equity continues to show interest remain unchanged and include Healthcare, Education and Financial Services driven by the broader macroeconomic fundamentals,” says Deloitte.

All Australia’s IPOs delivered a return of nearly 12% in 2016, outperforming the benchmark ASX200 index which closed 7% higher for the year.

The performance was better than the 7.9% of the previous year but well below the 24.1% of 2014.

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