Private equity growing

WITH the stock market booming, dozens of Western Australian companies have jumped at the chance to raise capital via a public float.

For some companies, however, the private equity market has been a more attractive option.

The companies opting for private equity include well-established fast growing businesses that would easily, if they chose, complete a successful public float.

Instead, they have turned to alternative sources of capital.

The latest transactions, announced last week, were capital raisings by niche financier Benchmark Debtor Finance and technology developer Cortec Systems (see separate articles).

Another recent transaction involved Kewdale transport company Mitchell Australia, which raised $10 million by selling a 30 per cent stake to AMP Capital Investors.

Private equity funds have also been involved in the ownership changes at Dome Coffees and Kailis & France Foods.

Both companies have been bought by their management, in partnership with private equity funds.

KPMG corporate finance director Peter Dawson, who helped to arrange the Kailis & France Foods transaction, said the use of private equity in Australia was well below overseas levels but likely to grow.

Private equity accounts for about 5 per cent of capital raisings in Australia but about 30 per cent in Europe.

“There are quite a few private equity houses cashed up and looking for deals,” Mr Dawson said.

“They are also becoming more competitive with their pricing.”

The re-listing of several major businesses on the Australian Stock Exchange has boosted the liquidity of private equity funds.

The latest example is the float of Pacific Brands, which will put more than $1 billion into coffers of current owners Catalyst Investment Management and CVC Asia Pacific.

Similarly, last year’s float of Repco Group put $440 million back in the hands of GS Private Equity, Gresham Private Equity and Macquarie Direct Investment.

Pacific Brands and Repco are prime examples of private equity funds buying solid businesses from a distressed owner and nursing them back to health.

The end result is solid returns, which encourage investors to pour in more money.

Wesfarmers, for instance, announced earlier this month that it would contribute up to $150 million to Gresham’s second private equity fund.

Mr Dawson said private equity funds targeted companies that had good management, low gearing, were profitable and had good growth prospects.

While a public float is an alternative way of raising capital, listing on a stock exchange carries major obligations.

“A lot of people don’t realise the amount of hard work involved in being listed,” Mr Dawson told WA Business News.

Dome Coffees managing director Nigel Oakey echoed this view.

“A public float was ruled out at an early stage,” he said.

“It’s a quick way to raise some cash but it puts some very costly pressures on companies, especially small and medium-sized companies.

“Compliance can be onerous once you are listed, and its something you have to live with.

“Its very hard to turn back.”

Hire Intelligence chairman Tom Crage is one person trying to turn back the clock.

His company listed on the ASX two years ago and, after traversing a rocky financial road, Mr Crage wants to revert to private ownership.

His bidder’s statement highlighted the danger of small listed companies falling off the radar of stockbrokers and investors.

“[Hire Intelligence] is arguably too small a company to be listed on the ASX and taken seriously by the investment community,” the statement says.

Mr Crage’s takeover offer has foundered after the independent expert’s report found his 13 cents per share offer (up from an original 10 cents per share) was neither fair or reasonable.

For some companies, the managerial and commercial support provided by private equity funds is an attraction.

Cortec Systems chief technology officer John Siliquini describes Foundation Capital and Technology Venture Partners as “smart money” because of their added contribution.

Both funds will have representatives on Cortec’s board and Technology Venture Partners has strong linkages to Cortec’s target market, the US telecommunications industry.

The involvement of private equity funds can be a two-edged sword, with some managers preferring the arm’s-length relationship with ordinary shareholders.

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