Private equity space remains risk averse

The private equity market has a role to play in boosting initial public offerings (IPOs), which are nowhere near their 2007 highs despite an increase in number, according to HLB Mann Judd partner Simon James.

A report compiled by HLB Mann Judd's head of corporate finance, Geoffrey Webster, revealed that in 2010 there were 96 new listings, 84 of which were small cap companies. Of all IPOs, 88 per cent were resources companies.

While the number of IPOs is growing each year, it is still some way from the 2007 high of 245 listings, and James felt that the private equity space had a role to play in boosting the economy. However, he said that private equity firms, in Sydney at least, were still very risk averse.

“Private equity [firms] are the guys who used to spend somebody else’s money, taking a few risks on everybody’s behalf and kind of pushing the economy forward,” James said.

However, most were sitting on assets that they had to sell at a premium due to buying when the market was at its peak, he said.

“These guys are only going to get the big bonuses if they actually make money on exit, and they are definitely shying away from IPOs at the moment,” James said.

“If we can get those guys to start thinking about IPOs again that would probably help to kick-start the economy for everybody else. The frustrating thing from an adviser’s point of view is that there are lots of good businesses out there that if they actually went to the IPO market to raise funds to drive their businesses forward, it would create value. But they’re sitting back because the risk is too great in this market and the multiples that they’re actually going to get they just don’t think are worth it at the time.”

James said there is a greater appetite for IPOs in the UK, for example, because the returns from cash were not as good as they were in Australia.

“If you look at the kind of returns you can get from putting cash in the bank at the moment, it’s actually alright,” he said. “That balance is so out of kilter, whereas in the US and the UK people are actually having to do things to get a good return.”

He said resources companies might be having a better time, which would explain why the number of IPOs last year was dominated by the resource sector. But it was a different story for those he described as a “normal trading company”.