Fund managers – Schroders’ Andy Brough being the most vocal – have said they will not buy any private equity float and are keen to give vendors a bloody nose. But how can the relationship between private equity sellers eager to exit their business and the institutional buyers be repaired?
At a breakfast round-table this week, broker Collins Stewart and its corporate finance unit Hawkpoint argued that the gap has widened between private equity vendors’ expectations and those of institutional buyers.
Piers Coombs, managing director of corporate broking at Collins Stewart, reckons the themes of the failed crop of IPOs were not what investors were looking for. Those that are going ahead should give a better indication of the market’s appetite, he argues.
While there is no doubt it will become a buyers market when valuations become more balanced between vendors and institutions, private equity vendors should consider a few ideas to try and get investors on side.
Firstly, what are investors looking for? Coombs believes it all comes down to growth. Whereas the stock market story last year was all about recovery, fund managers investing in the mid-market are now after genuine revenue growth at the top line that will push profitability ahead. They are particularly keen to find growth that is independent of the wider economy.
Additionally, investors want to know what companies that are coming to market will use their funds for.
They want money used to drive growth forward and are not interested in paying to deleverage companies with excessive debt. Travelport’s IPO failed and it was looking to raise £1.2bn to halve its debt. There is also now a very sharp focus on management and the chemistry both between the board members and between management and investors. How are they adding and creating value for the business? “The hurdles are high at the moment but if you put those together you have a strong case to take to the market and a stronger hand in pricing,” Coombs adds. “But it is still all about pricing.”
Mark Dickenson, head of corporate broking at Collins Stewart, says: “Everyone needs to take a step back, reappraise pricing expectations and the types of deals coming to market. But we need to make sure the buy side is ready and have a working relationship with the bankers.”