Simon Evans: Private equity firms dash for a narrow window

But will fund managers back new offerings now?
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The Independent Online

Apparently 19 January is the day when the official starting gun will be fired on a number of much talked-about flotations for London's market.

Corporate brokers are hurriedly putting on introductory meets in London's plush, City and West End hotels between the private equity firms looking to sell their wares on the markets and the fund managers who will have to do the buying. One leading fund manager I spoke to said that he had been inundated with requests by brokers to join such soirées but he is being selective about which ones he attends. As he told me last week, there's little point in going to these things when you have no intention of buying the goods being hawked.

Fund managers have plenty of reasons to be sceptical, especially given that much of their spare cash was spent underwriting the balance sheets of some of Britain's biggest companies last year through billions of pounds' worth of rights issues. This spend was done at an average discount of more than 30 per cent – a world away from the premiums private equity firms will hope to earn by flipping their assets.

There remains a lot of talk of a double dip in the economy too, so why would fund managers back new offerings now? I spent the last quarter of 2009 watching the FTSE 1000 nudge above the 5300 barrier, only to fall back, and then nudge up again the next day. The FTSE has since burst through the 5300 resistance barrier and today sits at more than 5500, but I'm perplexed as to how the market can keep up this pace.

I don't blame the private equity funds for looking to rush these offerings through. The strength of the market is unsustainable and they clearly know that there is a short window of opportunity to get these deals done.

A lot of private equity firms simply have to sell off their wares pronto. Investors fled from the asset class last year and there's no suggestion that they'll be running back soon. Some $35bn was raised worldwide by private equity firms in the final quarter of last year. Sadly, this was the lowest figure for six years.

The market for private equity companies selling their wares into the public arena was tested at the end of last year with the rushed listing of Gartmore, the fund manager part-owned by the American private equity firm Hellman & Friedman.

The listing eventually got away at a much more muted level than its sponsors initially anticipated, at 2.20p a share. After a rather inauspicious start to trading, which saw Gartmore's shares slump to just £2.08p, they have since "rallied" to £2.25p – hardly a carrot to entice the fund managers to invest.

It was reported last week that Ineos, the UK's biggest private company which is not private equity owned, had shelved plans to float this year. I'm sure others will follow despite the sometimes absurd talking up of the market by fee-hungry bankers.

January 19 is the date that the starting gun will be fired for the race to list in 2010. There will be some winners, but I fear that a lot of the runners won't make the finish line.

End of the pier Plans for more river transport won't float

Before me is a dodgy dossier by Andrew Gilligan and the Policy Exchange think tank. I jest, of course. But figures that the former BBC journo-turned-ubiquitous columnist and his team came up with last week in proposing "a new, waterborne Tube line" don't seem to stack up.

Ahead of Wednesday's report for the centre-right think tank, Gilligan claimed in his Evening Standard column that efficient, expanded travel along the Thames could be introduced for just £30m. The key words were "initial outlay". Little is included initially – just revamped piers – and much of the cost would be paid for by increased public subsidy, like that granted to London buses. The £30m will only pay for the redevelopment of piers in the "busiest and most important stretch of river". The rest would be "developer-led" – private firms having to cough up for piers as part of planning permissions. And this process is typically a negotiation with local authorities – there's no guarantee of developers funding pier revamps.

Businesses were keen enough on Crossrail, yet getting money out of them for that essential project was a Herculean task. Untested river services would prove far more difficult, as would encouraging the private sector to invest in boats, as the report suggests.

So, £30m? Not in 30 million years.

If the best fund manager in the country is gloomy, who am I to argue?

Few fund managers in the market today command the respect of Invesco Perpetual's Neil Woodford.

While pretenders have come and gone, the man who runs more money for Joe Public than any UK peer has been a consistent performer throughout the economic ups and downs of the past decade. In that time, Mr Woodford's income fund has returned more than 150 per cent to investors, compared to the average manager's return of less than 60 per cent.

That gives his prognosis for Britain in 2010 all the more gravitas and, apologies for the continued New Year gloominess, but it reaffirms my belief that we are set for a horrendously difficult year. Inflation then deflation, Britain losing its coveted top-tier credit rating, banks raising more money – it's a recipe for a miserable year, says Mr Woodford.

As mentioned above, the FTSE 100 continues to power on beyond 5500, but this cannot be sustainable. Britain's banks are in much better shape than they were a year ago, but they are not all out of the woods yet.

Lloyds Banking Group, in particular, still looks vulnerable. The extent of the write-downs on its HBOS-inherited property portfolio seem hugely optimistic. Kilmartin Holdings, one of Scotland's biggest developers, collapsed last week with reports saying Lloyds could be hit to the tune of £200m. The bank is already facing a £700m loss from last year's failure of Kenmore, another Scottish property group.

Mr Woodford's suggestion that Britain faces a credit downgrade also seems plausible. With the election looming, politics is replacing economics in the minds of those seeking votes. The deficit has to be addressed as a matter of urgency but there is little chance of that.

It may be gloomy stuff, but I'm afraid Mr Woodford has it spot on again. I know where my money will be going this year.

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