What Firmus’ shelved IPO teaches investors about valuation

Private-round and public-market valuations are rarely like-for-like, Pengana Capital Group’s Adam Myers has said.

As featured in InvestorDaily. View the original article here.

The reported gap between Firmus’ August private raising and the valuation sought for its IPO just two months later offers investors a lesson in what a private-round price does and doesn’t tell you, according to Pengana Capital Group executive director Adam Myers.

Myers noted it has been reported that the August capital raising valued Firmus at around $15 billion, compared with the $43.7 billion sought for the IPO.

“That’s a massive increase, and clearly one that the public market was not prepared to support,” he told InvestorDaily.

Myers said the episode showed investors who access the right businesses early  can share in significant value creation before a company lists, but that “the price paid, and the terms on which investors enter are extremely important.”

Last Friday, the NVIDIA- and Blackstone-backed technology company withdrew its ASX listing application and planned to pursue private capital instead due to “recent market volatility and prevailing market conditions”.

“Firmus will now pursue capital from the private markets and consider alternative public and private market options. We will provide additional information to shareholders as those options progress,” the company said in a statement.

Firmus’ planned ASX debut later this month drew scrutiny over disclosure, construction risk and customer concentration.

The offer came as investors weighed how to capture surging demand for computing capacity while managing the risks of projects yet to be built. Reuters reported on 2 October that Firmus, which operates facilities in Melbourne and Singapore with five more data centres planned across Asia-Pacific, was preparing a $5 billion IPO, with trading due to begin on 23 October.

Myers noted that Pengana has no visibility on the terms of the private transactions, but said the headline valuation is only part of the story.

“Private investors can negotiate different classes of securities, preferential rights, governance protections, and other terms that may materially change the risk and return profile of their investment,” he said.

“You can’t necessarily compare what an institutional investor paid in a private round with what public market investors are subsequently being asked to pay on a like-for-like basis.”

He pointed to an old investing adage: a good company isn’t a good investment at any price. Pengana has chosen to deploy its capital elsewhere as it builds the portfolio of the Pengana AI Private Opportunities Trust (ASX: AIX).

For investors and advisers assessing unlisted funds, Myers said private market valuations should be understood as indications of fair value. A recent financing round is an important reference point, he said, but it should not replace ongoing analysis of the business, its operating performance and changing market conditions.

He said investors should understand how valuations are determined and independently reviewed, whether companies are meeting revenue and earnings forecasts, what additional capital they may require, and how the valuation compares with public market comparables and actual transactions.

He added that in traditional underlying private equity funds, carried interest is generally earned through realised investment profits, subject to minimum return hurdles.

This, he said, creates an important alignment of interests, with managers ultimately rewarded for delivering realised returns rather than simply reporting higher valuations.

“Of course, independent valuation oversight remains essential,” he said.

Myers said investing in private companies has traditionally been much easier for large institutional investors, given the significant minimum investment sizes, their resources for due diligence and their ability to negotiate favourable terms, rights and protections.

For individual investors, access is more difficult and often comes through structures that may not offer the same protections, he said.

Few have the capital to build a properly diversified portfolio, which he described as “the only free lunch in finance,” and even more so in private markets, where outcomes can vary enormously.

He said listed trust structures are one way to address this, allowing investors to access a professionally managed portfolio of private companies, invest an amount appropriate for their own portfolio, and buy and sell units on the ASX, as long as there is liquidity.

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