Small businesses are increasingly turning to private equity firms for capital instead of the sharemarket. But the high amount of debt involved in many of the deals is raising concerns that the businesses will be vulnerable if there is a sharp economic downturn.
Treasurer Peter Costello and NAB chief John Stewart are the most recent high-profile figures to warn that private equity firms’ highly geared strategies could put companies and investors in trouble if the economy turns down. “Everyone feels private equity is going to end up in tears,” Stewart said.
Costello’s comments yesterday follow a warning from the Reserve Bank that the increasing frequency of high-debt deals could threaten Australia’s economic stability. The warning was part of the bank’s statement on monetary policy issued earlier this week.
HBL Mann Judd’s director of corporate finance, Justin Audcent, says non-resources small company listings dropped from 61 (valued at $792 million) in 2004 to 35 (valued at $407 million) in 2006.
These figures suggest firms are looking to private equity instead of to the sharemarket for growth capital. Audcent says the fall in listings is particularly striking given that share prices boomed between 2004 and 2006.
EL&C Baillieu analyst Ivor Ries says outdoor goods company Kathmandu is a classic example of a smaller company that decided to raise funds through private equity rather than an initial public offering (IPO).
“There are quite a few of these private companies that were seeking to go public but find private equity can pay a higher price,” Ries says.
He says the private equity deals for smaller companies are just as highly debt driven as the top end deals. “Debt is the private equity manager’s best friend, there is no doubt about that.”
– Mike Preston
The coalition continues to play a very crafty game this morning with its focus on Therese Rein, wife of the federal Opposition Leader Kevin Rudd.
Rein runs the international job-placement business Ingeus, which posted revenue of $175 million in 2005-06 and employs 1200 people in Australia, UK, France and Germany.
The coalition must be careful their attacks do not backfire. After all, Howard is positioning his party as supporting enterprise – and Rein, having created tens of thousands of jobs – should be poster girl for his party.
So how’s this for tactics? While the coalition will continue to undermine her, it is clearly going to be a very underhand campaign. This morning it was reported in The Australian that Workforce Participation Minister Sharman Stone defended Rein yesterday, in an indication that the Government has decided against attacking Rein publicly.
Expect more stories to surface – all companies as large as Rein’s Ingeus have experienced problems that can be exploited. And expect the coalition to come out and gleefully comment that they won’t comment.
We’re interested in your views:
If Kevin Rudd becomes Prime Minister at this year’s election, should Therese Rein step away from her business? Should Ingeus be excluded from bidding for government contracts?
– Amanda Gome
It is too early to assess the economic effects of the Howard Government’s WorkChoices reforms, according to federal Treasury. The executive director of Treasury’s economics division told a Senate committtee yesterday that the department is yet to model the effect on productivity and wages of the unfair dismissal laws.
But Wal King, CEO of construction group Leighton Holdings, obviously disagrees. He argues WorkChoices has eliminated upward pressure on pay that was formerly exerted by the unions in the building sector. John Sutton, the national secretary of the Construction, Forestry, Mining & Energy Union, agrees wages are being affected by the new laws.
Meanwhile, the Federal Government has responded by ridiculing research by the Australian Council of Trade Unions (ACTU) that shows women’s pay in the private sector has dropped by 2% over the past year, reports ABC online.
Recent bank reports are showing wages soaring. What is your experience? Email feedback@smartcompany.com.au with your story.
And click here to read The Big Issue story on how to keep wage costs under control.
– Jacqui Walker
IT News: Vulnerable Vista
Microsoft has issued a total of 20 software patches to fix 12 security flaws this month, of which six flaws carried the most severe “Critical” rating. One of the critical flaws affects the recently released Vista operation system, reports ITWire.
A newly discovered critical vulnerability was detailed in the Microsoft Malware Protection Engine, which affects the anti-spyware software Windows Defender, including the Windows Vista version.
Microsoft has admitted that Vista could have been exploited prior to installation of the patch.
Finding a critical security vulnerability just two weeks after Vista’s commercial release to consumers raises questions as to how secure the new operating system will be when malware purveyors have a wider user base to target.
– Jacqui Walker
Australia’s booming stockmarket could break through the magic 6000 point mark today, the ASX/S&P 200 hitting a record 5996.80 at 12.45 pm and continuing to move on an upward trend.
The price hike was driven by strong announcements from Leighton Holdings, and Commonwealth Bank, while Telstra managed to defy pessimistic market expectations with a $1.7 billion first-half profit.
The Westpac-Melbourne Institute consumer sentiment index for February rose 1.7%, reaching a figure 3.2% higher than at the same time in 2006.
In the US, the Government announced a record $US763.6 billion annual trade deficit.
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