The performance of private equity-backed listings on the Australian Securities Exchange from 2013 to 2015 was more positive than market sentiment reflected, even amid electronic retailer Dick Smith Holdings' high profile collapse, Australia’s lacklustre economy, and macro-economic volatility, according to Deloitte’s 2016 IPO Report.
“Private equity backed IPOs have once again been a significant contributor to IPO activity in 2015. Our analysis shows that had you invested in every PE-backed float from the start of 2013, you would today be sitting on a portfolio return of 48 percent,” Ian Turner, head of Deloitte transaction services said in the report.
Despite a general slowdown in business activity, Deloitte found that 40 private equity-backed listings during the two-year period delivered weighted average returns of 28 percent.
The report follows the announcement earlier this month that the Australian Senate would scrutinise the role of private equity in corporate takeovers as part of a wider inquiry into the causes and consequences of the collapse of listed retailers. In December, Dick Smith entered into administration. Anchorage Private Equity owned the company prior to its listing in 2013 and has been publicly criticised for its investment.
A report from the Australian Private Equity & Venture Capital Association and Rothschild Australia presented similar findings to Deloitte. From 2013 to 2015, private equity-backed IPOs have outperformed non-PE backed IPOs, achieving a weighted average return of 26.4 percent, compared to just 8 percent from non-PE backed IPOs.
However, capital raised from private equity-backed IPOs shrank from 2014’s record of $6 billion to just about $3.9 billion in 2015. Among IPOs that came to market in 2015, gains averaged only half of 2014’s figures – 18 percent compared to the previous year’s 37 percent.
The Australian market had launched 97 IPOs in 2015 – 17 of those companies were backed by private equity with a total market capitalisation of $17.6 billion. Post-listing performance however was just at 17 percent, a significant drop from the 42 percent reported in 2014.
Private equity firms have brought some sizeable companies to market in 2015. The year’s largest listings include Pacific Equity Partners-backed share registry and pension services provider Link Group and Bain Capital’s cloud computing software vendor MYOB
Domestic private equity houses including Next Capital, Ironbridge and Anacacia were responsible for most of the IPO exits in Australia last year, representing almost half of total listings by market capitalisation.
Three listings ended the year significantly up on their issue price. Shares in Anacacia Capital-backed speech and search technology services provider Appen, closed up 230 percent, shares in Magnum Capital-backed consumer goods company BWX rose 138 percent, and TDM Asset Management’s Baby Bunting Group’s shares climbed 70.7 percent.
Financial services, technology and healthcare sectors dominated 2015’s floats. Technology IPOs accounted for 37 percent of market capitalisation and 30 percent of capital raised, a significant leap from 2014 figures, 8 percent and 6 percent respectively.
Entering 2016, Deloitte expects smaller companies with promising growth stories, technology start-ups, healthcare companies, as well as businesses that take advantage of China’s consumer appetite to be a strong theme among the majority of IPOs.
One of the key factors behind this is the Australian government’s commitment to boost innovation in the next four years through a $1 billion initiative which includes promoting business-based research and development, tax breaks for investors and start-ups, and a $200 million innovation fund to co-invest in businesses.
Sectors that will continue to drive IPO markets in 2016 are technology and financial services, as well as consumer businesses (in areas such as agri-business, education and exports) – all benefiting from a lower Australian dollar and lower interest rates.
In addition, fund managers who are looking to diversify away from underperforming blue-chip stocks will drive demand for listings in the second and third quarters of the year, Deloitte reported.
“IPO activity will continue to remain strong in 2016 dominated by technology and financials, although we anticipate strong competition from strategic buyers and financial sponsors,” Tapan Verma, director of M&A transaction services at Deloitte said.
Listings may however be more subdued as private equity firms face increasing competition from inbound mergers and acquisitions deals from offshore private equity firms. It also expects a decline in capital raised this year as the more sizeable private equity-backed assets such as Link Group and Bain Capital have already listed in 2015.
Digital disruption in capital markets will also have a huge effect on listings. The technology, media and telecommunications (TMT) sector in Australia far exceeded expectations in 2015 and will continue to draw investor interest in 2016.
On a regulatory front, the Australian Securities and Investments Commission’s will continue its scrutiny on private equity-backed listings, following the demise of Dick Smith.