The following article is from the AVCJ December 2020 edition, where one of our portfolio companies Silk Laser, is featured. The successes and failures of private equity backed IPOâs in the Australian market are discussed.
Written by Tim Burroughs.
You can read the article on the AVCJ website here
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Australia IPOs: Window of opportunity
Asian Venture Capital Journal | 04 December 2020
Australian public market investors are famously unforgiving of private equity when IPOs fail to perform. The markets are open for business again, but how long will the golden period last?
What a difference a year makes. Twelve months ago, frustration was in the air as consumer lending business Latitude Financial and online real estate portal PropertyGuru tried and failed to initiate a revival for private equityâbacked IPOs in Australia. Both offerings â seeking A$1.4 billion ($1 billion) and A$380 million, respectively â were pulled at the bookâbuilding stage due to concerns about secondary market volatility. And so, the more than threeâyear wait for a sizeable IPO continued.
Now the window appears to have swung open again and no one is willing to pass up what might be a fleeting opportunity. âIt opens, everyone rushes in, and inevitably the quality drops and investors get sick of it, or the lowâquality stuff gets away and then doesnât perform,â says Justin Ryan, a managing partner at Quadrant Private Equity. âThen it closes.â
Quadrant secured a first partial exit from its growth fund in October when Adore Beauty, a local beauty eâcommerce business, completed a A$270 million IPO, ending Australiaâs fallow period. The private equity firm â which took A$137.7 million off the table â was mindful of potential pitfalls, with getting the offering out before the US election an immediate priority.
Plenti, a consumer lending startâup backed by Five V Capital, beat Adore to the bourse by about one month with a smaller offering. Since Adore, a handful of other companies with financial sponsors have made their market debuts. Trent Peterson, formerly of Catalyst Investment Managers and now operating predominantly on a dealâbyâdeal basis is responsible for two of them: Dusk, a specialist home fragrance retailer, and Universal Store, which sells youth apparel.
Various others have filed for IPOs, including Silk Laser Clinics, a cosmetic treatments business owned by Advent Partners, and Nuix, an analytics software provider that counts Macquarie and Armitage Associates as investors. They are looking to raise A$83.4 million and A$953 million, respectively, with the PE investors to make partial exits. Still more are working on offerings. Robert RadcliffeâSmith, a managing partner at Advent, notes that the traffic in this IPO season is as busy as heâs ever seen.
âThe trough was at the end of May, from a transaction perspective. Since then, every month itâs got better and better. If youâd said to me in May that we would have this wave of IPOs in the fourth quarter of 2020, I would have thought you were mad,â says David Willis, a partner and national private equity leader at KPMG Australia.
Seeking alpha
There are several reasons why expectations have been confounded in this way, but the preeminent one is the same as in many other markets around the world: Investors are chasing returns and public equities have rebounded sharply from their initial COVIDâ19 malaise. In Australia, superannuation funds have plenty of cash at their disposal, while an increasing number of public market investors are reaching into the preâIPO rounds in search of additional alpha.
Macquarie Capitalâs recent A$260 million investment in data registries business Illion, which facilitated a partial exit for Archer Capital, could be seen in this light â Macquarie did the same with Link Group a couple of years before the companyâs IPO â but demand is arguably most virulent for highâgrowth technology startâups.
Blackbird Ventures has three B2B startâups in its Fund I portfolio â Canva, Culture Amp, and Safety Culture â that are being actively courted by lateâstage investors. âThere is a huge amount of interest,â says Rick Baker, coâfounder of Blackbird. âIt starts with private market growth funds, then crossover funds or hedge funds that do public and private markets investing, and finally some public market investors want to come in as well.â
Those three companies alone are in demand; everything else is still too early for the twoâyear preIPO cutoff. Baker notes that neither Canva, Culture Amp nor Safety Culture is rushing to list, and assuming they do, Australiaâs capital markets might not be the beneficiary. There is still a perception among entrepreneurs that the US markets are deeper, less prone to volatility, and populated by investors with a greater understanding of technology. They want to follow in Atlassianâs footsteps.
Change is contingent on a few startâups taking a risk on the Australian Securities Exchange (ASX) and demonstrating strong secondary market performance, thereby giving confidence to others. While the ASX has emerged as an attractive listing destination for smaller technology companies, they make little impact on the overall market capitalization and the sector remains underrepresented.
This unmet demand combined with a general interest in the beauty eâcommerce narrative and strong performance from listed comparables in the consumer space â Temple & Websterâs stock was up more than 400% for the year through midâOctober â underpinned Quadrantâs confidence in Adore. The multiples, enterprise value (EV) to EBTIDA and EV to revenue were 96x and 3.9x, high enough to raise numerous eyebrows.
The valuations say much about the areas where investors are keenest. Dusk and Universal, which are still mainly brickâandâmortar retailers though they are growing their eâcommerce channels aggressively, achieved EV/EBIT multiples of 6.7x and 10x. Silk Laser, a strong growth story in a fragmented industry where there is little existing public markets exposure, is on 11.2x EV/EBITDA, while Nuix is on 27.5x (and 9x for EV/revenue).
Looking forward
Given the various bureaucratic necessities â reviews and approvals from the ASX and the Australian Securities & Investments Commission (ASIC) â a company that hasnât already completed its filings has scant hope of listing before Christmas. Several industry participants do not see this as a problem; there is an expectation that the window will remain open well into the first half of 2021.
Quadrant and Advent are among those considering IPOs for other portfolio companies, though they offer do not give expected timelines. No surprises as to the sectors. Quadrant is looking to list Graysonline, an industrial and commercial auction site, while Advent sees Compass Education, a softwareâasâaâservice (SaaS) provider for schools, as a strong candidate.
Opinion is divided on two recent failed IPOs, neither of which involved private equity. On one hand, they are outliers: Fantastic Furniture traded well through COVIDâ19 and questions were raised about its normalized earnings; HWL Ebsworth is a law firm and multiple partners were looking to cash out, so there were concerns about stability. On the other, fatigue might already be setting in.
As is generally observed, COVIDâ19 denied the market an IPO opportunity earlier in the year, so planned offerings are being pushed into the second half and unplanned offerings are looking to take advantage of the moment. A coolingâoff period over Christmas might be to everyoneâs benefit. KPMGâs Willis warns that sentiment can easily turn: âAnything thatâs a bit gray, not a mustâhave, people end up passing on it.â
Given this innate uncertainty, it pays to jump through the IPO window as soon as it opens. Advent did this with Silk Laser, moving from a standing start to launching an offering within eight weeks. The process was facilitated â and deârisked â by institutional investors agreeing to cover half the IPO, which allowed time to talk to smaller investors and the retail market. Quadrant did the same with Adore, with Ryan noting that virtual roadshows helped in terms of speed to market.
Boutique financial services firm Highbury Partnership advised on the Silk Laser offering, as well as two others this year, one of which was Plenti. Matthew Roberts, a partner at Highbury, stresses the importance of speed to market, noting that investor patience and capacity are not inexhaustible, especially when lossâmaking technology companies are involved.
âAustralian investors get quite fatigued; we always hear that. If youâre at the front of that queue you get a better reception. What weâve seen this time around is some companies trading well on the secondary market, so investors are making money and that encourages more IPOs,â he says. âOnce they come, and investors are recycling money out of IPO into another, if they donât trade well on the secondary market, those that follow will be impacted.â