Australia: private equity in focus

Continuing the country-specific focus seen on Wednesday's schedule at SuperReturn Asia in Hong Kong, it was Australia's turn to take a step into the limelight.

Moderated by Yasser El-Ansary, Chief Executive Officer at AVCAL Australian Private Equity and Venture Capital Association, three players in the market offered us their expert views, starting with the opportunity sets.

What are the opportunity sets in Australia?

"Some institutional investors' perception is that the Australian market lacks a diverse opportunity set, that it is all about resources and commodities and consequently it is hard to justify a greater flow of capital," began Yasser El-Ansary by way of introduction.

"The truth is that the Australian market is predominantly a services-based economy," he countered. "Resources are only a modest part of the overall economic activity."

Panel member Peter Gold, Managing Director at Archer Capital agreed:

"We see the opportunities here as good as we've seen it for the last 20 years of looking for PE investments in Australia," he said.

"If you define the market by the number of private businesses and the number of public businesses in our size range, it is pretty much the same as it always was. What's different compared to ten or 15 years ago is that a lot of the opportunities came to us in formal sales processes and IMs distributed by investment banks, whereas these days we have to be a lot more active and go and uncover those opportunities ourselves."

Tony Duthie, Managing Director at Pacific Equity Partners, had seen a lessening of competition, which he felt was a key part in keeping valuations at a reasonable level:

"We've seen global guys retreat having had mixed success, and some of the mid-market players have also gone. The multiples that we're paying for businesses in Australia are down to the fact that we've got a sensible and well structured set of players," he outlined.

"What's also helped valuations is that we've got a cartel-based banking sector in Australia which limits the amount of leverage that we can put into these assets. We're typically borrowing between 3.5 and 4.5 times leverage and in the US you wouldn't get out bed for that."

According to Serge Allaire, Portfolio Manager at MLC PE, Australia has been one of the best performing countries across their portfolio. It's attractive for various reasons, he said. Macro components are strong – Australia has had 25 years of uninterrupted growth – on the exit front there is a lot of trade sale and IPO, leverage is not to high, and there are quality managers.

"I think the most important thing that we have observed is the competition in Australia is not that big. If you contrast it to other regions, Scandinavia for example has the same population, the same GDP, but four or five times the number of active managers. And you have quality managers. That's a good recipe," he said.

Deal flow

"Successful GPs are active in their approach to investment management, and in defining what deals are capable of being done," said Peter when the conversation moved onto deal flow.

"We focus on what has now become very commonplace language in PE across the globe, what's your investment thesis, what are the things you are going to do in your period of ownership. If you can define those good investment theses you've got a decent chance of participating well."

"If you're sat waiting for Goldman Sachs to send you an IM you're not going to be doing very much," added panel colleague Tony, referencing the way things were done in circa 2007.

"A lot more of the deal sourcing is self generated, typically proprietary or bilateral."

But what made Australia different, Tony explained, was the amount of residual assets that are sitting around:

"We see a lot of assets being released over the years out of multinationals and conglomerates – and we still have a lot of conglomerate structures in Australia.

"The other sources are the typical public to private sales. And there's a lot more lead-time in sourcing and getting deals done; we're working on things that have sometimes taken us two to three years to get to the point of a sales process."

What about the effect of China in the Australian context?

Serge argued that while the biggest impact from China's slowdown would be felt in the mining and resources sector, PE only played a small part in this space:

What he did see was more and more opportunities on the exit front:

"More and more Chinese investors are coming to Australia to buy companies in buys that are strategic," he explained. "There has been a clear increase in pace over the last three years. Our sense is it's here to stay which gives Australia a good exit dimension."

The Australian dollar was an additional factor, he added, - it's cheaper to come and buy here.

The high quality of Australian businesses was also playing a part, according to Peter.

"A big theme that we hear from the Chinese buyers is that it's not just putting capital out there it's what capability or expertise can be taken back into China to leverage that investment," he said.

The pension pot

No conversation about Australia would be complete without referencing the AUS$2tr in savings accumulated through the compulsory DC system, a lot of which is still looking for a home domestically as well as globally. This presents some real challenges for LPs looking to allocate it.

Serge didn't see the deployment of his portfolio changing dramatically, but he did for others.

"There are other players, pension funds and others, that see big inflows, the growth is for them disproportionate, and that creates challenge for them, especially if they want to play in the PE space," he thought.

"When you start thinking of deploying billions a year, some may be tempted to migrate away from being an LP and become almost a GP themselves, but that path is definitely fraught with danger."

Direct investing and co-investing

Finally, the trend for direct investing and co-investing was a phenomenon that is here to say, said moderator Yasser. What opportunities did this give GPs?

"We're open to looking at larger transactions than we can do on our own," said Peter. "Having said that we are very focussed on staying in our niche, there are other GPs with team sizes and structures which are much better suited to those transactions. For us it's the same as it's always been, we're not too focussed on what the competition is doing."

Tony hasn't seen much evidence of the direct model, but a lot of demand for co-invest. "Out of every three deals we would have opportunities to put co-invest to work, so that fits well with our model," he concluded.