Brian Gaynor: IPOs - assess with care, before you decide to invest

The clear message to investors is that all IPOs should be assessed with care. Photo / File

Intueri Education and Metro Glass are standout duds.

The dismal performance of Metro Performance Glass has refocused attention on private equity IPOs.

How have these IPOs performed, and have private equity firms encouraged investors into buying shares at inflated prices?

Two of the worst examples of private equity floats are Feltex Carpets and Dick Smith, both of which went from boom to bust in a proverbial flash.

Credit Suisse First Boston Asian Merchant Partners, LP sold $204 million of Feltex shares before the New Zealand company listed in June 2004. The carpet company went under just over two years later, in September 2006.

Dick Smith listed on the ASX in September 2013 after Anchorage Capital Partners realised A$358m from the sale of an 80 per cent shareholding in the company. The Australian retailer went kaput in January 2016 but kept its head above water for one month longer than Feltex after listing.

On the other hand, Ryman Healthcare and Freightways have been two extremely positive private equity IPOs.

Before listing in June 1999, Ryman had four 25 per cent shareholders: John Ryder, Kevin Hickman, Ngai Tahu and Direct Capital. The last of these is an Auckland private equity company that was listed on the NZX in the 1990s. Ryman, which was worth $135m at the IPO price of $1.35 a share, is now worth more than $4.6 billion.

Freightways listed in September 2003 after the sale of $124m of shares by ABN AMRO Capital (Belgium) NV.

The courier company, which was worth $195m at the $1.60 IPO price, has a current sharemarket value of nearly $1.2b.

There have been 26 NZX main board IPOs since the beginning of 2013, with six of these - Intueri Education, Scales, Metro Glass, Tegel, NZ King Salmon and Oceania Health -- having strong private equity backgrounds. Three of the IPOs were Crown sponsored while three had corporate sponsors. The latter three were Z Energy, with NZ Super and Infratil as the major pre-listing shareholders, Investore, which was spun out of Stride Property Group, and Wynyard, which came out of Jade.

The remaining 14 IPOs were primarily driven by founder shareholders.

The performance of these four IPO groups has been as follows:

•The three Crown IPOs, Mercury Energy, Meridian Energy and Genesis Energy, have all delivered positive returns for investors.

•Two of the three corporate-sponsored IPOs have had negative returns, with Z Energy being a positive exception.

•Only six of the 15 founder-driven IPOs have delivered positive returns, with SLI Systems, IkeGPS and Orion performing particularly poorly.

•Only three of the six private equity floats had positive returns, as illustrated in the accompanying table.

Intueri Education was listed in May 2014 and was placed in voluntary administration in June 2017, lasting just less than a year longer than Feltex and Dick Smith. Its IPO was sponsored by Arowana International, an ASX-listed private equity company.

Arowana proudly boasted "we have a long-term commitment to building and growing strong and sustainable small and medium-sized enterprises that will have a positive impact on economies, industries and the people they employ".

The company's website still brags that "vocational education company Intueri Education was established by Arowana in June 2010 and initially comprised one college in Christchurch, New Zealand. In the following four years, Arowana orchestrated a buy-and-build programme that saw Intueri's profits increase 20-fold, cumulating (sic) in an IPO in May 2014 that delivered a more than 700 per cent return to Arowana".

A feature of Intueri was that all five directors were appointed on the day before the prospectus was registered. How can a board of directors fully understand a company when they are all appointed just before a company is about to raise money from the public?

Metro Glass, another poorly performing private equity IPO, also appointed most of its directors just days before its prospectus was issued. Chairman Sir John Goulter, Bill Roest and Russell Chenu were appointed just two days before the IPO was launched while the other two directors were the chief executive, Nigel Rigby, and Neville Buch. The latter was a partner of Australian private equity firm Crescent Capital Partners.

What understanding did Goulter, Roest and Chenu have of the complex glass sector and how could three new directors challenge the two existing directors, both of whom had detailed knowledge of the company?

By contrast, the chairman of well-performing Scales Corporation had two years' experience with the company, as had two other directors.

In addition, most of the other Scales directors had extensive agribusiness experience.

Companies with directors who have company and industry experience generally perform better than those that appoint individuals with little experience just before a prospectus is registered.

There is no clear evidence from the past few years that private equity IPOs are any better or worse than non-private-equity floats. However, there is clear evidence that many New Zealand IPOs are poor quality and investors should scrutinise them carefully.

Poor-quality IPOs were a major feature of the 1980s sharemarket boom and these floats were widely discussed at this week's gatherings to mark the 30th anniversary of the 1987 sharemarket crash.

One of the main questions being asked was: what was the worst IPO in 1987?

There were 65 IPOs that year with only seven surviving as viable businesses. These were Bank of New Zealand, Countrywide Banking Corporation, Petroleum Corporation of New Zealand, Bancorp, Hallenstein Glasson and Michael Hill. The first three were taken over, Bancorp delisted and the last two remain listed companies.

The seventh viable 1987 IPO was Rank Group, Graeme Hart's original company. It went extremely quiet after the sharemarket crash but eventually became the launching pad for Hart's hugely successful business career.

But the clear winner as the worst float of 1987 was Kiwi Bear, which registered its prospectus on January 6 and listed on March 9.

Kiwi Bear's basic business model was to trap wild possums and keep them in captivity until their fur, pelts and meat were ready for sale. Pelt prices had risen sharply and the Auckland company's main aim was to develop the world's first commercially based possum farm and abattoir.

Kiwi Bear's model relied on high prices for possum fur, skin and meat but these collapsed after the 1987 sharemarket crash. In 1988 the company conceded that its business was unsustainable and its prospectus forecasts were "incredibly optimistic".

Kiwi Bear, which was voluntarily wound up in April 1989, was unanimously declared the worst float of 1987 at this week's gatherings. This wasn't a quick decision because most of the 65 IPOs that year were shocking.

The clear message to investors is that all IPOs should be assessed with care, whether they be private equity, corporate or founder shareholder driven. New Zealand has had more IPO duds than winners over the past 40 years, mainly because of the huge number of flawed companies that listed between 1982 and 1987.

Private equity floats can be both good and bad, with Direct Capital IPOs having a particularly positive record. It is wise to be careful of IPOs, particularly those promoted by overseas private equity firms that appoint ageing directors with little or no industry experience. The warning bells should be ringing loudly if new directors are appointed just days before an IPO disclosure statement is registered.

Intueri and Metro Glass were the dud private equity floats of 2014 but the one consolation is that the latter was nowhere near as bad as Kiwi Bear and most of the other 1987 IPOs.

Brian Gaynor is an executive director of Milford Asset Management, which holds shares in several companies mentioned in this column on behalf of clients.