Beating up on Oz GPs

Amidst the acres of coverage given this week in Australia to news that Sydney-based Archer Capital had reportedly postponed plans to list sports retailer Rebel Group, the faint beating of tom-tom drums could once more be heard. These are the drums reserved for the private equity industry by a hostile Australian media. (Thanks go to Andrew Rothery, chairman of the Australian Private Equity & Venture Capital Association, who came up with this metaphor in a speech at last year’s AVCAL conference.)

All reports this week focused on Archer’s apparent decision – refuted by the firm – to push back the Rebel Group IPO date due to the poor recent performance of retail stocks on the Australian Securities Exchange (ASX). In addition, lingering attention was paid again to the recent flotations of TPG-backed Myer Group and Goldman Sachs JBWere Private Equity and Quadrant Private Equity-backed Kathmandu.

Both companies are currently trading below their issue price – Myer, which went public atA$4.10, today closed at A$3.51, and Kathmandu closed at A$1.60 (issue price A$1.70). Myer, in fact, never rose above its flotation value.

The insinuation was there in more than one article this week that these dips in share price are somehow due to the companies’ private equity origins. “Investors are skeptical particularly when private equity investors are involved,” one commentator in The Sydney Morning Herald quoted a UBS capital markets executive director as saying.

But as many a GP has pointed out, the slumps in share price at the two companies come in the overall context of a drop in appetite for the retail sector – especially in view of reports of poor pre-Christmas sales at many shops.

The negative focus on private equity is nothing new. “We’re the whipping boys for everything,” said one Sydney-based GP. “Every problem in corporate Australia is the fault of private equity somehow.”

Myer Group in particular has become a focal point for the media and the public’s mistrust of the asset class. Its poor performance since day one has led to accusations it was over-priced by greedy private equity investors out to make a fast buck – a spin that has only been exacerbated by subsequent attempts by the Australian Tax Office to bill TPG for tax it claims the firm has avoided paying.

Whatever the final outcome for Myer, some warn that in general, the public and media hostility may well become a factor GPs must consider when assessing their exit options. “People will take a view on whether they want to list their businesses or just want to sell them to corporate players, both domestic and foreign. That would be a shame for Australia because it would deprive the stock market and Australian investors, but GPs wouldn’t have to play all the public games,” said one Sydney-based GP.

Others, however, remain sanguine and continue to trust in the ability of investors to cut through the hype. “We’ve just got to believe that the market is logical and will assess each business on its own merits. Despite what you might read in the press down here, investors are smart people. If they can buy a business at a price they subscribe too, they’ll buy it.”

Fighting talk, which investors are likely to welcome. But when the tom-tom drums will begin to relent remains an open question.