Dick Smith leaves private equity back in the dock

Australian private equity firm Anchorage Capital could face a senate inquiry in the wake of electronics retailer Dick Smith’s collapse last month.

Independent South Australian senator Nick Xenophon has demanded the firm, which bought the company from supermarket chain Woolworths for A$94 million ($65 million; €60 million) in 2012 and exited through a A$520 million initial public offering in 2013 on the Australian Stock Exchange, explain what went wrong.

Anchorage says it had “implemented a rapid and highly successful turnaround programme” before selling its final stake in a block trade in September 2014, reportedly making a 4x return on its original investment. That programme involved installing new management, rolling out key performance indicator dashboards in all stores, creating new marketing programmes and significantly clearing obsolete stock. As a result, EBITDA increased from A$23.4 million in 2013 to A$71.8 million in 2014, the firm reported.

Having been left with little stock after Anchorage’s ownership, the company had to restock shelves, which it financed by borrowing. It also started work on expansion plans to add another 25 stores.

Dick Smith’s financial woes came to light when its shares fell almost 60 percent in November. It revealed that its stock was worth $60 million less than expected and downgraded its profits forecast a few weeks later.

Last month, Dick Smith Holdings ceased trading and went into administration. Founded in 1968 by Richard “Dick” Smith, the company began as a car radio installation business in Sydney. It has grown to become an electronics retail giant and, as of January, employed more than 3,300 people across 393 stores in Australia and New Zealand.

As administrator Ferrier Hodgson gets to grips with the retailer’s demise, private equity practitioners are not overly concerned by the prospect of a negative reaction, either from public markets investors, the general public or from policymakers.

Wen Tan, co-head of private equity Asia Pacific at Aberdeen International Fund Managers, says the Dick Smith affair was “not a game changer”.

“Private equity in Australia is fairly mature and sophisticated; I don’t think there would be any particular antipathy towards private equity. At the margins, there will be greater focus on private equity-backed companies as they come up for initial public offering. There will be some question marks from the broader non-business community too, but this negative publicity on private equity will certainly not reach the levels we saw post global financial crisis,” he says.

Yasser el-Ansary, chief executive of the Australian Private Equity and Venture Capital Association, adds: “It is very disappointing to see any business that was previously backed by private equity face financial distress. In the isolated instances where that happens, it’s entirely appropriate that investors, market regulators and the media ask tough questions about precisely what happened – which is why the formal voluntary administration process underway right now is so important to being able to answer those questions.”

This is not the first time a private equity-backed IPO has resulted in subsequent losses to investors and ensuing public controversy. Previous examples include US hospital group HCA, which was floated by KKR and Bain Capital in 2011 only to see its share price tumble by 30 percent later that year. In Europe, perhaps the most spectacular example was Danish jewellery group Pandora, which lost more than 70 percent of its value post-IPO, also in 2011.