Pepper Money is believed to be launching a management roadshow this week for its initial public offering, coinciding with the float of Latitude Financial on the Australian Securities Exchange.
The non-bank lender Latitude is listing on Tuesday as a $2.6bn business and both non-bank lenders, Latitude and Pepper Money, count private equity firm Kohlberg Kravis Roberts as their owner.
KKR owns Latitude with Varde Partners and Deutsche Bank and the owners collectively are retaining a 66.4 per cent interest in the business once it is listed.
The IPO was priced at $2.60 per share and the company has offloaded a stake of about $500m.
The price secured for Latitude equated to 11.6 times annual net profit. The free float will be about $860m.
Critical to the decision by KKR as to whether it launches the Pepper IPO will be the performance of Latitude.
KKR’s moves to float Pepper come as the non-bank lender remains in the final stages to buy Westpac’s auto loan business.
On offer is about $2bn worth of loans and the opportunity to secure a business that writes about $5bn of new loans a year.
Also in the final stages of the contest are private equity firms Cerberus, TPG Capital with Liberty Financial and Allied Credit.
Sources close to Pepper maintain that the business can still proceed with its float plans if it is successful in making an acquisition of Westpac’s auto loan operation.
Sources say so far the feedback on Pepper from fund managers is that they would pay no more than nine times profit, given they believe Latitude is a superior business.
KKR is looking to float only the Australian arm of Pepper Money, retaining the international arm of the business.
Fund managers will learn further details about the characteristics of Pepper Money this week.
It is thought to consist of assets under management worth at least $10bn.
The understanding is that KKR wants to sell down about 30 to 50 per cent of the company.
KKR had looked at listing Pepper before the pandemic, but working on the IPO plans this time around are Credit Suisse, Goldman Sachs and RBC Capital Markets, along with adviser Reunion Capital.
Latitude specialises in consumer finance, with an interest free instalment business that is driven by long-term merchant relationships with companies including Harvey Norman, JB Hi-Fi, The Good Guys and Apple.
Latitude locked in demand for its float by receiving cornerstone support from four Australian institutional investors that provided $120m of funds. Retail investors then provided about a further $80m.
Japan’s Shinsei Bank also purchased a 10 per cent stake for $300m.
Institutional investors weighed into the cornerstone deal, which was advised by Insight Capital Advisors, after it was pitched to them as a business with strong profitability and returns amid a low interest rate environment, with similar aspects to the business as the Australian banks.
Australian banks trade at 14 times net profit for the 2021 financial year, whereas Latitude will be priced below 11 times.
Annual earnings per share growth is set to be at least 10 per cent and it will offer a 6 per cent yield.
In personal loans, Latitude has eaten into the market share of the top four banks, with its market share growing to 12 per cent.
The company has promoted itself as a relatively low risk and resilient business that has strong asset quality, diverse funding and good management.
Drivers of growth are expected to be new products and cost reduction.
Latitude also had Credit Suisse, Bank of America and Jefferies working on its listing.
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