Take a New Look, Good Flotations are Still Possible
Stockmarket-quoted companies have had no trouble raising money, so how come unquoted companies are finding it so hard to come to market?
In short order, Travelport, fashion retailer New Look, and the Merlin leisure group have pulled planned flotations at the last minute because of investor resistance. Many other directors and advisers are thus rethinking the initial public offers currently taxiing towards the runway.
But this is a problem of private-equity not public businesses. The common theme of those pulled share issues is their ownership: private-equity firms and funds desperate to crystalise profits -- not least to offset paper losses elsewhere.
The businesses they are selling are often as mature as the quoted companies that raised record sums in rights issues through the stockmarket over the past year: New Look has been selling fashion since the 1960s and first floated on the stockmarket in 1998, for instance, while Merlin's Madame Tussauds subsidiary dates from Victorian times.
The problem is the corporate structures encouraged by private-equity. Despite the name, these funds are based on debt rather than equity: they gear up businesses to lever the returns but must eventually repay those loans.
That means trade sales, flotations or -- the ultimate parcel-passing -- sales to other private-equity funds. That last option is off because the credit crunch has made borrowing impossible but trade sales require buyers with free cash too. So stockmarkets look appealing, especially after the rise in share prices. However, markets differentiate between companies raising money for expansion and owners issuing shares to take profits.
Investment managers have a choice of buying any travel group, retailer of leisure company; why would they buy a fully-priced flotation when they can buy discounted shares in a rival with a long trading history and which understands the disciplines demanded of public companies? Any business seeking to come to market with questionable corporate governance, excessive incentive schemes or unproven profits records will be treated with suspicion.
And the private-equity sector has only itself to blame: managers of quoted funds have not forgotten how Debenhams was taken private, geared up and refloated at a price the retailer has never seen again. Investment managers have no wish to be caught again. If a company is such a good purchase, why would private-equity mangers be selling?
But that stream of successful rights issues shows fund managers do have money to invest in quoted shares and markets are not closed to new issues.
However, private-equity funds have misread the market and expected too much: a conservatively-priced company with a cleaned-up board and rewards scheme ,plus a business plan that delivers growth, is likely to receive a reasonable reception.
Investors would rather their money went into the business than finance the owners' exit and they would have more confidence if the private-equity owners retain a stake after flotation, but stock markets need new companies as well as new money.
Private-equity sellers should expect less and deliver more.