Deciding on IPOs

Wise_Investor_2

Completely agree with the above statements. For many Royal Mail was a 'trade' not an 'investment'. Investing has a lot of highs and lows over the long-term!

doughnutmachine

srcandas wrote: »

Don't get me wrong I appreciate scepticism especially when I'm persuading myself to invest but if you are not HMGov the most common reason is to be able to raise cash (within the business) both at floatation and in the future. The company has a formula and they have taken it a long way. To expand further in a scalable and secure manner requires substantial reserves.

If he just wanted money then why not sell without the floatation hassle?

From my understanding this IPO is so Terra Firma can take money off the table (ie it's not going to be invested in new renewable energy projects).

I love the projects they have and I'm into green technology. But at the same time I'm never happy about being a shareholder in a company dominated by one person (only 30% is being floated). I also expect a lot of these financial sellers increase profits only by accountancy tricks.

I might have a dabble in it, but it's not the type of investment that fills me with unbridled enthusiasm.

bigadaj

doughnutmachine wrote: »

From my understanding this IPO is so Terra Firma can take money off the table (ie it's not going to be invested in new renewable energy projects).

I love the projects they have and I'm into green technology. But at the same time I'm never happy about being a shareholder in a company dominated by one person (only 30% is being floated). I also expect a lot of these financial sellers increase profits only by accountancy tricks.

I might have a dabble in it, but it's not the type of investment that fills me with unbridled enthusiasm.

Interesting to look at the history of terra firma here, hands certainly got burnt on emi but is generally a smart cookie, which frequently means those on the other end don't profit.

Infinis was the remnants of his venture into waste management, he bought wrg and then added shanks landfills to it, total cost of £800 million and then persuaded the Spanish to buy it with a£500 million profit whilst retaining infinis.

Classic private equity move is to ramp up profits either by small scale rapid expansion, ruthless costs cutting or similar approaches that won't last, but plenty of people buy the story, frequently just as the costs catch up and the profits die.

There are opportunities, such as developing wind farms on landfill sites which reduces the costs for the electrical connections into the grid. A significant cost, but I'd expect it to be aggressively priced.

bowlhead99

I haven't looked at Infinis in any detail, but assuming Terra Firma follow the "sell down in several tranches" model which many private equity IPOs do, as speculated in the press, they won't necessarily want to list at a crazy high price with everyone knowing they have a sizeable stake left to dump... that won't help keep the price high for selling the later slices, which they do very much want to be able to exit at a good value.

Clearly, PE owners are always going to want to maximize their investors' returns so won't want to give away a bargain to enrich the masses and create a feelgood factor for the remaining tranches - unlike the government on Royal Mail or, to an extent, RBS as a forced seller of Direct Line. So it's unlikely to be the bargain of the year.

However, there is an element of forced-ness about Terra Firma's exit. This deal was done in their 2002 vintage fund, and it's not an evergreen fund that just keeps running and running. It's a closed-ended, limited life investment partnership which is well out of its investment period, with institutional investors who want their money back to spend or to redeploy in other opportunities, or perhaps to reinvest into new funds, Terra Firma or otherwise.

Typically this type of vehicle has five or six years to build up a portfolio and another five or six years to exit the portfolio investments. If you've got past the first 10 years, plus another year or two extension if necessary to avoid having to dump the assets in a fire-sale, the investors are really looking to get out.

So, the goal is not necessarily to achieve the absolute maximum potential cash-on-cash multiple against their cost. It's to exit within their timeframe at an acceptable annualised rate of return. So, the firm is looking to bank some profits, add to their track record with a perfectly decent return and some performance fees for themselves, and take investors' minds off the fact they haven't got an exit on their cinemas yet which sit in the same fund.

So, speaking generally and without looking at the fine details of Infinis's prospects and pricing, the circumstances of this exit don't necessarily imply it will be outrageously priced to get every last pound into the hands of the PE fund at IPO with nothing left for new backers over the next five years. On the contrary, there could be another ten years of profit and asset value growth left in it, but the Terra Firma fund that currently owns a majority share, plus existing management and whomever else has a piece, simply aren't looking for a 15+ year hold.

Antimoron

imoneyop wrote: »

Who will have made their £300odd profit in a couple of weeks and will be thinking this is easy money, I'll do it again and will end up getting their fingers burnt.

Expectation and aim plays a huge part here.

Investments by definition are meant to be long term commitments - and so looking at it with that view, it is correct that IPOs are not great as a strategy.

If however, your aim is to make even £10 after costs, a well considered IPO purchase will disregard longer term factors such as viability, yield, dividends etc which are essential when looking to invest and commit to a share.