Capital markets raise record $42.5b - KPMG

The capital markets reaped a record amount of equity, raising $42.5 billion in financial year 2005-06, an increase of 22 percent on the previous year, according to KPMG's Capital Markets Survey 2005-06.

In launching the survey, executive director in KPMG's Corporate Finance practice, Antony Cohen, said 2005-06 was a year of record-breaking performance in terms of equity raised, Initial Public Offerings, debt issued and level of activity from private equity firms.

"You have to ask: Is this as good as it gets?" he said.

"In addition to the record $42.5 billon in equity raised, $77 billion of debt was issued and private equity raised $3 billion on top of that.

"We expect total private equity funds under management to exceed $14.5 billion by the end of 2006. It was a landmark year for local private equity houses as well as for internationals investing into Australia. Pacific Equity Partners became the first Australian fund to raise over $1 billion with some significant funds being opened such as PEP Fund III, which raised $1.2 billion. Kohlberg Kravis Roberts & Co also set a new Australian private equity transaction record ($1.8 billion) with their first investment in the Australian market.

"Private equity upped the stakes in 2005-06, pushing up multiples and causing auction-style transactions. We expect this to continue into 2006-07 as superannuation funds continue to pump funds through to them."

While last year's hot sectors were utilities, real estate and resources, the areas to watch for activity in 2006-07 include uranium, transport and media.

"As oil prices skyrocket and the push for environmentally friendly energy intensifies, alternative energy sources such as uranium will attract more focus and investment. As Australia possesses around a third of the world's uranium reserves, we expect to see a good deal of investment in this sector in the coming years. The challenge for this industry and others is to overcome the social and regulatory concerns as well as infrastructure bottlenecks," said Mr Cohen.

Jamie Green, an executive director in KPMG's Corporate Finance practice, also noted that transport and logistics would be a hive of activity in 2006-07.

"In the wake of the Toll Holdings' takeover of Patrick Corporation, we expect that the other players in the transport industry will be manoeuvring to compete against the conglomerate and further consolidation to increase scale would seem to be part of the plan. In addition, the forced sale of some of Toll/Patrick's businesses will further stimulate the sector.

"The lifting of media restrictions on both foreign and cross-media ownership has already put merger and acquisition activity in the sector on the front page. We are already seeing a wave of money being invested into the sector and share prices climbing in anticipation of a flurry of transactions. It will be the first time in 15 years these assets have been on the market so we expect a high level of excitement when the roll-out of the changes is finalised," said Mr Green.

Highlights of the KPMG Capital Markets Survey 2005-06
For the second year running initial public offerings were the number one fundraising vehicle for 2005-06 responsible for $11.9 billion or 28 percent of total equity raised, followed by placements ($11.6 billion), dividend reinvestment plans ($7.3 billion) and rights and entitlements issues ($6.0 billion).

Top 5 equity raisings - 2005-06

Company name Raising type Equity raised ($m)
Goodman Fielder IPO 2,649
SP AusNet IPO 1,415
Spark Infrastructure Group IPO 1,145
Dyno Nobel IPO 1,075
Westpac TPS Trust Rights issue/ hybrid 763

The 2005-06 financial year set records for IPOs with an impressive $11.9 billion raised in 164 transactions. Excluding the earlier Telstra T1 and T2 issues, 2005-06 saw the highest aggregate dollar raised by IPOs in a decade.

"This high level of IPO activity was driven by the buoyancy of the Australian share market and the weight of money from superannuation in combination with the resources boom, activity in the private equity sector, strong growth in company earnings and the performance of the Australian economy, now in its fifteenth consecutive year of expansion," said Mr Cohen.

While the main feature of 2004-05 was the sheer volume of IPOs, the latest year witnessed the return of the "super floats". Thus the year saw four IPOs exceeding the $1 billion level compared with none in the previous year.

The average value of IPOs increased from $53 million to $72.5 million per float. However, the number of IPOs declined from 185 to 164. There was also a decline from 62 to 50 in "micro floats" (those below $5 million). This decline ran counter to experience, as strong market conditions traditionally produce a rush of small company floats.

The weighted average cost of listing as a percentage of the capital sought has been on an upward trend for several years. It has grown to 6.88 percent in 2005-06. As seen in previous years, there was an inverse relationship between the size of a capital raising and the cost of listing as a percentage of the amount sought.

Hybrid securities remained popular in 2005-06, making up $13.2 billion of the $42.5 billion raised during the year.

Mr Cohen said that factors driving the demand for hybrids included the tax benefits to issuers, the continued strong demand from investors keen for yield and recent changes in the rating and regulatory environment.

"The hybrid securities market has traditionally been dominated by companies in the banking and diversified financials sectors. While this trend is still visible in 2005-06, there were an increasing number of companies outside of these traditional sectors issuing hybrids such as Orica, Fairfax and healthcare company DCA Group," said Mr Cohen.

2005-06 was a record year for the debt markets. Bank loan volume was driven to a new high of around $77 billion, largely as a consequence of increased corporate refinancing together with mergers and acquisitions and leveraged buy-out activity. Acquisition-related loans were 49 percent higher than in 2004-05.

"The increased financing of leveraged buy-outs resulted from banks working with private equity houses to aggressively gear bids and pay high acquisition multiples. Recently released data shows that leveraging in private equity-backed deals is continuing at record levels.

"Companies with ratings below investment grade raising finance in March 2006 had debt of 5.73 times EBITDA. This is the highest figure since the leveraged loan market started to be tracked in the late 1990s.

"However, despite this significant increase in leveraged finance deals, debt refinancing remained the main driver of corporate borrowing, accounting for 42 percent of all corporate debt raising in 2005-06," said Mr Cohen.

The top three industries for equity raisings for 2005-06 were real estate ($7.6 billion raised), materials ($6.8 billion) and diversified financials ($4.1 billion). Banks took the greatest dip this year dropping from the number one rank in 2004 with $6.0 billion to number seven in 2005-06 raising only $2.2 billion.

Utilities enjoyed a boost in raisings from $1.2 in 2004-05 to $3.8 billion in 2005-06, while the food, beverage and tobacco sector saw the strongest growth jumping from $352 million to $3.1 billion during the year primarily as a result of the Goodman Fielder float.