Privateers won’t dump and run as investors think twice on floats

Privateers won't dump and run as investors think twice on floats

Privateers won't dump and run as investors think twice on floats

THE pipeline of potential private equity floats is building, but most vendors are retaining stakes in the assets they take public.

If equity markets remain stable, the major private equity houses in Australia are expected to list a number of companies next year following the positive response from investors to the $6 billion QR National float in November.

Top of the list could be Hoyts, Rebel Sport, Pact Group and Manassen Foods.

The floats could be worth up to $14bn.

However, following the mixed response to private equity floats over the past two years with Myer and Kathmandu, the sellers are expected to be keen to shed the “dump and run” tag and keep stakes of up to 30 per cent in some assets.

Blake Dawson partner Mark Stanbridge said there would be a growing appetite from investors for the private equity houses to retain some ownership to show that “value would be kept on the table”.

“I don’t think it’s something that’s probable, I think it will definitely happen,” he said. “There will most certainly be a requirement and a desire on the market for private equity to stay in the game.

“The question is what percentage that will be by. Whether its 20, 25 or even up to 40 per cent is anybody’s guess. From a private equity perspective, there’s a number of considerations. They are going to want to show confidence and show that they are not taking all the value off the table.”

The Myer sale, in which TPG sold down 100 per cent of the stock last year, has created negative sentiment among some investors towards private equity because of the shares’ secondary market performance.

The US-based group generated the market’s first big float of the cycle by selling out its controlling stake at $4.10 a share.

The shares fell away the moment they started to trade, and are now at $3.56.

Kathmandu last traded at $1.34, well below its $1.70 issue price.

TPG and its fellow investors in Blum Capital converted a $US300 million investment in Myer in 2006 into a sale worth $US1.8bn.

The stock’s performance, along with choppy market conditions this year, has been seen as a reason for some private equity vendors holding back assets from floating.

Instead, a secondary private equity market emerged this year with Champ selling Study Group to Providence for $660m in July while the China Merchants Group bought Loscam, the pallets group, from Affinity.

Mallesons partner Lee Horan said while it was likely a growing number of sponsors would retain some ownership, an “overhang” risk could emerge in the stock as investors await the private equity owners to eventually sell down.

“The market is going to determine what needs to happen and I think there is some wariness of sponsors exiting completely,” he said. “The market wants sponsors to retain the skin in the game, but there is a risk that it is being created with private equity maintaining a stake and that is overhang risk.

“I think the premise is right, the market will demand the sponsors staying in but that needs to be balanced because the overhang risk could create downward pressure on a share price.”

Allens Arthur Robinson partner Tom Story said the move for sponsors to keep a stake, follows an overseas trend especially in the US, where the industry is more developed.

“There’s assets in the pipeline that need to get sold one way or another that did not get called this year because markets were poor,” Mr Story said.

“People are going to want to get these deals away and if that means only a partial selldown then that is what they will have to do. It’s probably not going to be their preference, people will want to exit 100 per cent if they can. That’s their desire.

“It’s fair to say that offshore, particularly in the US, private equity houses are used to when they IPO an asset, they typically tend to retain 25 per cent up to 50 per cent.”

Deutsche Bank’s equity capital markets managing director, Justin Dwyer, said a stake being retained was unlikely to affect the asset’s valuation during the IPO process.

“I don’t think it would adjust the valuations per se,” Mr Dwyer said. “We value a company on the company and it’s underlying performance and how it compares to other business.

“We don’t value a company on whether there’s a retained holding or otherwise.”