By Byron Kaye

Pacific Equity Partners hopes to pull off one of Australia's most profitable private equity exits in years when it floats cleaning and catering company Spotless Group with a market value triple what it paid less than two years ago.

But with relatively little detail about how Australia's biggest equity player made what it says is a A$1.9 billion ($1.78 billion) company out of an asset it paid A$723 million for in August 2012, some investors wonder if the change of fortunes is too good to be true.

"What has happened in two years, not even that, for private equity to turn it around, to now be offering just on A$1 billion for just over half,?" said IG Markets strategist Evan Lucas told Reuters. "Yes, they've done some cost cutting, but with private equity, you don't really get to see exactly where that's at."

PEP, which declined to comment on the float, plans to sell 51 percent of Spotless in an IPO worth up to A$1 billion, set to be the biggest Australian listing since November 2010.

At one third the country's average private equity turnaround time, according to data from Preqin research, Spotless also ranks among the fastest times for a private equity firm to buy a company off the stockmarket, restructure it and then list it back.

PEP's exact return is not known, but assuming it put in 50 percent of equity to buy Spotless - the average for recent Australian buyouts - the firm could make more than five times its initial investment, according to Reuters calculations.

Doubling cash paid is considered a success in private equity. Adding A$1.2 billion to the company's total capitalisation in 21 months would represent a gross return of 166 percent.

PEP has already pulled cash out of Spotless - it paid itself a dividend after refinancing the firm's debt in 2013, further boosting its overall return on the investment.

A successful float would vindicate PEP's role in a bitter takeover battle for the 68-year-old Melbourne-based firm, which for five months resisted its offers claiming it could revive its sagging profits itself.

Australian IPOs

More broadly, a strong float from Spotless would signal a recovery in the Australian IPO market which, despite an increase in activity, remains cautious following years of erratic share price movements and several high-profile flops.

Investors still have bitter memories of the TPG Capital Management-backed IPO of department store operator Myer Holdings Ltd in 2009. The stock has never traded above the A$4.10 per share offer price and has lost nearly half its value since listing.

PEP has had its share of troubles with IPOs. In 2011, it floated KFC and Sizzler restaurant owner Collins Foods Ltd in a A$202 million IPO, close to what it had paid six years earlier. Three months later Collins gave a profit warning. Its shares are yet to trade over their issue price.

IPO issuance in Australia since the beginning of the year has more than doubled to $1.2 billion over the same period in 2013, according to Thomson Reuters data. Companies raised $6.04 billion from new listings in all of 2013, the best year since 2010.

Spotting opportunity

Spotless CEO Bruce Dixon defended the speed of restructure, saying it was well in train by the time PEP took control.

"I don't think everyone appreciates it but ... it wasn't a plan developed right at the takeover," Dixon told Reuters via telephone from London, his only media interview during meetings with institutional investors ahead of a bookbuild starting on May 20.

"We had a head start of 18 months (prior) to the deal."

The Spotless restructuring involved selling an underperforming plastic coat-hanger firm and its international business, as well as slashing management overheads by half, all by early 2013, he added.

The prospectus shows evidence of cost cutting with PEP forecasting Spotless's net profit to double in the 2014 financial year and grow by another 28 percent in 2015, despite flat revenue.

Dixon said future growth would come from A$1.5 billion worth of possible new business rather than more cost cutting.

Simon Mawhinney, a senior portfolio manager at Australian fund manager Allan Gray, said his firm typically sidestepped private equity-backed IPOs.

"We don't have a competitive advantage in assessing which are the good ones which have sustainable earnings, and which are the bad ones which essentially have been dressed up for IPO, costs ripped out, (with an) unsustainable cost base," he said.