Citi head of investment banking Tony Osmond says companies will continue to flee public stock exchanges, as extraordinary levels of private capital floating around the globe help to “seduce” management into escaping ever-rising governance requirements.
Mr Osmond, speaking ahead of Citi’s 10th annual Australian and New Zealand investment conference starting in Sydney on Wednesday, said companies with a market value of $7 billion had floated on the ASX this year, but $15 billion of companies had left via takeovers or privatisations, with the latter mainly orchestrated by private equity.
Several large companies that appeared headed for an initial public offering have ended up in trade sales this year, including Quadrant Energy (eventually acquired by Santos) and Accolade Wines, which was sold to private equity firm The Carlyle Group. “That trend has been pretty consistent since the GFC,” Mr Osmond told The Australian Financial Review.
Companies usually list to access capital and liquidity, but Mr Osmond said private capital pools were so plentiful – and relatively lower cost than in the past – that the former requirement had been negated. The liquidity that companies sought by listing on the public exchanges was also much easier to find.
“It’s quite easy now to go and run a sale process – you’ll quickly have 10 financial sponsors knocking on your door,” Mr Osmond said.
Another less discussed but important factor was that staying off public exchanges meant a lot less governance and compliance work for company boards and executives.
“You can hardly blame them – they get 30 per cent of their time back,” Mr Osmond said of management who decided to stay private.
While the IPO market has been weak, mergers and acquisitions have been running hot, with $120 billion of deals this year.
Drop in payout ratios
Mr Osmond says rising bond yields in around the globe – which set off dramatic market moves in the last week – are providing directors and executives with a license to go for growth, after a long period where investors in Australia were obsessed with dividends.
“These inflation fears that are pushing up bond yields … will absolutely flow through down here,” he said. “Companies actually need a way to grow to the top line to maintain margins. And the only way to do that is to invest. As we see bond yields rise what we are seeing is a reduction in dividend payout ratios.”
Payout ratios have dropped from around 80 per cent in 2015 to below 70 per cent at present. Mr Osmond said the shift has “been less about confidence and much more about the pressure from shareholders to return capital.”
Citi’s conference, which will be attended by around 700 investors and 70 companies, couldn’t be better timed, given the ructions in global markets.
Key speakers at the event include deputy governor of the Reserve Bank of Australia, Guy Debelle, and William Hague, Britain’s former foreign secretary, who should provide some valuable insights into Brexit.
Mr Osmond said the dramatic market movements showed bond yields and trade tensions were starting to bite, although he pointed out the VIX Index – the so-called fear index that tracks volatility – is only sitting around 20, compared to 80 during the GFC.
He also said many investors would see the drama as an opportunity. “Investors have been complaining for the last two years about not being able to find value in the sharemarkets,” Mr Osmond said.
The ASX was trading at a price-to-earnings ratio of 15 times, down from 16.5 times – and not far from the long-term average of 14 times.
Mr Osmond said the Australian economy remained resilient, although house prices and political uncertainty had to be watched. “You’ve got one political party that’s got some polices that can actually swing share price meaningfully in some sectors,” he said, pointing to Labor’s polices on negative gearing and franking credits.