AIM shares and their private equity backers

There have been a number of high profile private equity-backed companies that have floated on AIM in recent years that, generally after an initial period of positive performance, have proved to be big losers. However, some of the companies that were initially private equity-backed have done much better and been big winners.

Convenience store retailer and drinks distributor Conviviality (CVR), which floated in 2013, is the most obvious of the disasters having effectively lost all its value.

Other disasters have been toilet tissue manufacturer Accrol (ACRL), parcel delivery firm DX (DX.) and Australia-based online retailer MySale Group (MYSL), which never traded above its placing price after an initial day’s trading when there was confusion about whether the share price was being quoted in pence or pounds.

Pinsent Masons, which is the number one lawyer on AIM by number of companies, recently published Private Equity IPOs – The 2017 inside story, a report covering the performance of companies that had been private equity-backed prior to joining the market. This report covers both the Main Market and AIM. Pinsent Masons has published two previous reports as well.

Pinsent Masons says: “We operate a broad classification of private equity: we do not require a majority stake or specify a minimum or maximum hold period to classify an investor as private equity and therefore include venture capital and growth funds. We do not include hedge funds, debt funds or patient capital, as each of those investor classes views itself as performing a different function to private equity.” Only flotations were there is a fundraising are included.

I am using the companies that Pinsent Masons has identified that floated between 2013 and 2017 as the basis of this article. There are other companies where substantial shareholders have sold at the time of flotation, but these are not classed as private equity-backed businesses.

It appears that the strong stockmarket over the past couple of years has attracted more of these flotations. The median holding period for the private equity investors prior to flotation was 74 months in 2016 and 42 months in 2017. That figure includes both Main Market and AIM flotations. Ten of the flotations in 2016 and 2017 came to the market less than three years after the initial private equity investment.

In 2017, in the cases of majority of the AIM companies floating, the management sold shares, while the remaining shareholding was locked-up – normally for 12 months. All the companies initiated executive share schemes on flotation.

Source: interactive investor            Past performance is not a guide to future performance

In its publications on the subject, lawyers Pinsent Masons identified 41 companies that have joined AIM between 2013 and 2017 that it classes as private equity-backed. There were 13 in 2017, eight in 2016, two in 2015, ten in 2014 and eight in 2013.

Four of the 41 AIM companies have been taken over. Software supplier Kalibrate Technologies (KLBT) was the only one to manage a small gain on its flotation price. Contact centre operators Digital Globe Services (DGS) and IBEX (IBEX) were both acquired by the same buyer at significant discounts to flotation price, particularly Digital Globe Services (DGS) which had performed strongly when it joined AIM. These three companies joined AIM in 2013.

The fourth company taken over was Quantum Pharma (QP.), which floated at the end of 2014. Pharma services and specialist drugs supplier Clinigen (CLIN) bought the company last year in a cash and shares bid. That bid would currently be valued at 72.5p a share compared with the 100p a share placing price.

All four companies had gone to premiums after their flotations but trading disappointments had led the share prices to fall back.

Conviviality, of course, is about to leave AIM because it has gone into administration and its assets sold off. Nominated adviser Investec resigned on 5 April.

Retailer Bonmarche (BON) moved to the Main Market prior to its trading problems and the share price has nearly halved.

That effectively leaves 35 of these private-equity backed companies on AIM. Of these, 13 have lower share prices and 22 have higher share prices, although Alpha Financial Management (AFM) is only 0.5p above its 160p a share flotation price.

Most of the fallers have gone to good post-float premiums but subsequently run into trouble. The exception is MySale. Eight of them are trading at less than half their flotation price.

Eleven companies are trading at more than double their flotation price. Mixer drinks supplier Fevertree Drinks (FEVR) is more than 20 times its flotation price. Robotics software provider Blue Prism (PRSM) and video games developer Frontier Developments (FDEV) are also ten baggers. These three investments would more than make up for the losers – if investors had got access to them prior to admission.

It is tempting to think that if private equity backers bail out at the time of the flotation then the outlook for the share price might not be so positive, while keeping all the stake could be seen as a positive sign.

Yet, in 2017, the share prices of three out of the four companies where the private equity backers did not sell any of their stake, have fallen. In fact, the worst performer of the private equity-backed flotations last year was Ethernity Networks (ENET), where the share price is down by nearly 55% in little more than nine months.

Three of the 2017 AIM flotations involved the private equity backers selling out completely: Alpha Financial Management, Arena Events (ARE), which provides temporary structures for events, and kettle parts manufacturer Strix (KETL). All are trading above the flotation price, although only Strix is at a significant premium. Arena Events has already been hit be weaker than expected trading so it has lost much of its pre-float gains and it will be interesting to see if this is just a blip.

Initial backer Lloyds Development Capital sold shares in the Fevertree flotation and sold the rest in two tranches within 12 months of admission to AIM. The founders have also been selling shares. This is normally a negative signal but in the case of Fevertree it has not hampered the progress of the share price.

At first sight it appears that it is unfair to be too cautious about these private-equity backed flotations. However, it does seem that the ones that are less likely to do well are in more mature areas. Private equity firms will probably have squeezed out the major cost savings and further rises in profit will be more difficult to obtain when growth is hard to come by. For example, companies making toilet tissue, such as Accrol, or in highly competitive areas such as parcel delivery firm DX. The share price of transport company Eddie Stobart Logistics (ESL) has drifted lower and Numis recently cut its price target from 185p to 150p, which is below the flotation price of 160p.

Conviviality was a relatively mature booze retailer and that is why it went chasing growth by making acquisitions in the distribution sector, as well as trying to be a consolidator in the alcohol and convenience store retail market. The acquisitive burst proved difficult to manage, as shown by the ‘surprise’ tax charge.

FFI (FFI) is trying to diversify from its focus on providing film finance into post-production services but the market seems unconvinced given the halving of the share price.

Markets do change, though. Proposed changes in legislation have hit personal injury leads provider NAHL (NAH) and it has had to change its strategy. The original backers had already got out.

Many of the spectacular performers are in growth businesses and have management teams in place that have the ability to take advantage. It is easier to grow a business when its market niche is also growing. Fevertree Drinks and Blue Prism are two examples of this. Whether their premium ratings will be maintained over the longer-term is uncertain.

Pinsent Masons believes that the prospects for private equity-backed companies floating this year are good, but it thinks that they will want to come to the market before the fourth quarter. That is because there could be worries about the uncertainty about the UK’s departure from the EU. This uncertainty could continue into 2019.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company’s or index name highlighted in the article.

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