Private equity flotation flood may herald end of bull market

Graph And Coins

There is an old City adage about one occurrence being a fluke, two a coincidence and three a trend. If the platitude is true, the financial markets can feel fairly confident of at least one thing at present: they are seeing a consistent pattern.

Flotations of companies owned by private equity firms are flooding to the market, after the enticing preview given last November with the £3.4bn float of the Madame Tussauds and Legoland owner, Merlin Entertainments, which was backed by Blackstone Group and CVC Capital Partners. Its shares have added about 11% since.

But over the past few weeks scores more floats of private equity-owned businesses have been announced, ranging from the estimated £1.2bn valuation being put on the pet shop chain Pets at Home, which is backed by the US buyout firm KKR, to the £750m offering in the Warburg Pincus-owned discount retailer Poundland and the seemingly astonishing £3bn price tag put on King Digital Entertainment, the UK-based company behind the Candy Crush Saga mobile phone game, whose largest shareholder is Apax.

But there are even more. Added to that list are a £225m float of the convenience store giant McColl's (its backer is Cavendish Square Partners) and the former G4S target ISS (EQT and Goldman Sachs), which has unveiled a £4bn offer in Copenhagen. The surfer clothing store Fat Face (Bridgepoint) and discount retailer B&M Bargains (Clayton, Dubilier & Rice) have hired financial advisers – regarded as proof that both companies are about to float.

So, is this rush to offload these investments a sign that private equity investors have sensed the markets have reached their peak? Some believe so.

Geoff Wilkinson, research associate at the City broker Linear Investments, said: "I think that's absolutely right. You've got the FTSE 100 and the S&P 500 around all-time highs, so both sides of the Atlantic have seen substantial capital gains. There is always a spate of [private equity] deals towards the top of the market when purchasers have the most equity [in their existing portfolios], while if you are raising money you have to give fewer shares away.

"But the equity market does tend to live on planet equity and they always see everything through rose-tinted glasses. They have pretty much ignored the shift back into bonds, which is the classic 'risk-off' trade."

Meanwhile, the billionaire hedge fund manager George Soros, who predicted the credit crunch, has been building a large bet that the stock market will tumble. It emerged this week that his Soros Fund Management has boosted its so-called "put" position – a bet that the market will fall – on the broad Standard & Poor's 500 stock index.

Still, equity markets have defied widespread scepticism and have had much to be bullish about over the past 12 months. Last year the S&P 500 soared by almost 30% on Wall Street, while in London the FTSE 100 gained 14% as markets were buoyed by monetary stimulus from central banks. Share price levels have been maintained despite the US beginning to taper its quantitative easing programme – buying sovereign debt from financial institutions. This is because of a sense that growth is returning to major economies, alongside the emergence of a new wall of money that needs to be invested in shares.

One such influx is about to take place over the coming days. Vodafone shareholders are set to receive around 102p a share, as part of a £49.4bn windfall, after the mobile phone group's sale of its stake in the US group Verizon Wireless for $130bn (£78bn).

Much of that money will be ploughed back into equity markets, and City analysts reckon that as most current shares are fully valued, new issues will seem relatively attractive to investors – a mood noted by private equity firms. Alastair McCaig, a market analyst at the financial spread betting group IG, said: "There is going to be a lot of money kicking around, what with the Voda situation – and it looks like Morrisons is going to be taken out by a private fund. There are plenty of buyers out there who are keen to get involved."

Certainly, the private equity sector is delighted that this selling opportunity has arrived after years of its members holding on to investments following the financial crisis. That said, the industry can argue that those who have punted on private equity's flotations have been rewarded with steady performance.

Shares in private equity-backed companies listed last year rose by 25% globally, according to data by the accountants EY. In Europe they rose by 10%.

Powered by article was written by Simon Goodley, for The Guardian on Wednesday 19th February 2014 23.23 Europe/London © Guardian News and Media Limited 2010


image: © teegardin

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