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Private Equity to Test Investor Appetite in Australia

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October 1, 2015

 

The volatile stock market has resulted in a muted investor appetite, but private equity-backed companies have remained a bit more upbeat. While initial public offerings have not been the chosen route for many firms, especially in Australia, the mood might be about to change.

 

Private equity firm, Pacific Equity Partners (PEP), has launched its IPO of Link Group, the administration and registry group. The flotation could become the country’s biggest of the year.

 

The Link IPO

 

On Wednesday, the company filed the prospectus on the Australian stock exchange. According to the filing, the company is planning to sell around 42% of Link Group, with 162,5 million shares priced around A$6.37 each.

 

This gives the company a market capitalisation of up to A$2.3 billion and it would raise around A$946.5 million with the IPO. If all goes according to plan, then the IPO will be Australia’s biggest of the year and the company will become a top 100 company on the ASX.

 

The listing will see the private equity firm reduce its stake from the current 52.9% to 30.3%. Link’s management team is also reducing its stake to 7.9%, from the current 11.9%.

 

The Potential of the Company

 

Investors could well welcome the IPO with a warm handshake. The company is the biggest provider of technology-enabled outsourced administration services in Australia and a leader in shareholder management and analytics.

 

It has forecast its revenue will increase next year from the current A$588.3 million to A$750 million. Furthermore, much of its revenue is classed as recurring, with plenty of growth opportunities internationally.

 

Martin Hickson, a senior equity analyst at Wilson Asset Management, told the Sydney Morning Herald, “Link’s IPO is priced at a premium to the broader market, but that is reasonable given the high-quality recurring revenue generated by the business and its solid growth outlook.”

 

The company is also confident the markets are more than ready for the IPO. John McMurtrie, chief executive at Link Group, told the Australian, “Only 2 per cent of our revenues across the board are subject to market activity, corporate activity, IPOs…so it’s a highly defensive stock but, we believe, with very strong growth prospects.”

 

The Troubled Markets

 

While private equity-backed companies have not turned their backs on the markets, especially in the US, the mood hasn’t been very promising. In Australia, big private equity-backed IPOs have seen their shares fall.

 

Costa Group Holdings, the fruit and vegetable producer, is currently trading slightly above the listing price, having dropped to A$1.77 in the summer. Its private equity owner Paine & Partners sold the shares at A$2.25 per share in the IPO. The software maker MYOB is another Australian IPO trading below issue price.

 

Reuters reported how this year’s private equity-backed IPOs are far from the record-breaking levels of last year. In 2014, these listing created $6 billion, while this year has so far only made $1.47 billion.

 

Mason Willoughby-Thomas, portfolio manager at Australian Ethical, assessed the IPO to the Sydney Morning Herald by stating, “The valuation looks full, leaving little room for error. It requires flawless execution of the company’s growth strategy and the ability to successfully deliver synergies associated with the Superpartners acquisition.”

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