Part of the explanation for the failure of the float probably lies in the external environment,while there were probably other factors that were more within the vendors’ control.
The environment for any large float is brittle and even more so for a financial business that is by definition highly-leveraged and leveraged to external conditions.
While it made sense to point to Latitude’s potential in buy now pay later sector - it also drew attention to the vulnerability of its traditional business.
The erratic nature of the Trump administration in the US and its impact on global growth,economic uncertainty and market volatility has,along with Brexit,created a risk-averse environment.
In this market,the flow-on effects of the banking royal commission and the toughening of the financial service regulatory regimes and regulators’ approaches has been compounded by the severity of the economic slowdown and the uncertainty generated by the novel monetary policy settings and debates.
One rather disturbing strand to the explanation for the failure of the float was a discrepancy between the way it was viewed by domestic investors and the treatment it received offshore.
Almost all the demand for the shares was domestic,with particularly strong interest from retail investors. The offshore interest was minimal and it was that weakness that derailed the offer.
Viewed from afar – and at a moment when institutional investors are wary about equities anyway – the Australian financial system probably appears to be dysfunctional and threatening.
The royal commission,the backlash against the banks,the massive remediation payments,the banking executives accountability regime,the sudden aggressiveness of the regulators and the continuing politicisation of the sector appear to have unsettled offshore investors unwilling to distinguish between regulated banks and non-bank organisations such as Latitude.
The apparent foreign investor aversion to anything financial in this market could become an issue,and a destabilising one,should there be another moment of global financial stress.
The sudden and rapid emergence of the buy-now,pay-later (BNPL) sector headed by start-ups such as Afterpay has also added a destabilising element to the traditional consumer credit sector and highlighted the absence of"moats"to protect the established players.
Latitude tried to counter the threat of the BNPL players by joining them,launching its own LatitudePay product relatively recently.
While it does have significant advantages in that space – a new technology platform,established relationships with the major retailers and an existing profitable business to leverage - chief executive Ahmed Fahour may have over-emphasised LatitudePay at the expense of its core businesses. In other words,there may have been too much made of the sizzle and not enough of the steak.
The attempt to reposition Latitude as a fintech was understandable – the BNPL players don’t generate profits but trade at massive multiples of their revenue – but may have had unintended consequences.
While it made sense to point to Latitude’s potential in the BNPL sector and try to attract a tinge of the investor optimism about the sector’s prospects – and a boost to the multiples of its actual earnings that might generate - it also drew attention to the potential vulnerability of its traditional businesses to the new players in personal credit.
The lack of a Latitude track record in the sector meant it lacked credibility relative to the Afterpays and Zip Pays.
It might have been better to focus on the GE Money heritage,Latitude’s size,its relationships with the major retailers and companies such as Virgin Australia (which it signed up to its BNPL offer this week) and its profitability.
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Latitude won’t be brought back to the market again any time soon. The aborted IPO was its second attempt to float,with the initial effort last year thwarted by the untimely illness of its then-CEO.
The only obvious options for the private equity owners now would appear to give Fahour and his team more time to develop their BNPL business and demonstrate the resilience of the legacy finance lines or else find a trade buyer or another group of private equity investors to sell to.
Latitude is profitable,generates a high return on their capital because of its model of borrowing long and lending short – it churns its capital – and has upside in the personal finance space if Fahour executes well because the banks are retreating from it.
The private equity owners always planned to hold onto a clear majority of Latitude’s capital despite the IPO,so they are clearly comfortable retaining their exposure.
Private equity,however,always wants an eventual exit and a return of capital to its own investors so at some point in future we’ll probably see the third attempt to float the business. That point,however,is now likely to be quite distant.