australia

Australian Private Equity Industry Set for a Debate

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September 7, 2015

 

The Australian private equity industry is faced with plenty of turmoil. Private equity funds have plenty of capital to deploy, but the competitive market is making it hard to find enough profitable acquisitions. On top of this, the fee structure is under scrutiny in Australia, just like it is elsewhere in the world.
The above topics are surely one of the key debating points at the upcoming Australian Private Equity & Venture Capital Association Limited (AVCAL) conference this week. So, what do the numbers say about the current industry outlook?

 

Slowing Activity

 

Australian law firm Minter Ellison’s latest report shows deal activity in Australia has slowed down, despite a relatively good start. For the 2014-15 year, the first half saw a number of small deals, meaning deal value was less than AU$100 million, but the activity dropped during the latter six months.

 

The report believes the reason was mainly down to a short supply of suitable assets, and this could be a problem for Australian funds until the end of the year. The situation is not made any easier by the depreciation of the Australian dollar and the increasingly competitive market.

 

Ricky Casali, a partner at Minter Ellison, was quoted in the Sydney Morning Herald stating, “There is an abundance of capital and a shortage of quality assets”. According to the report, the positive sectors to focus on remain healthcare, education and transport. The firm also believes the typically strong sectors of finance and the retail sector will most likely bounce back in the next nine months.

 

The AVCAL has also released some data, which shows that private equity transactions only accounted for 4% of Australia’s deals in 2014-15. This is a significant drop to the nearly 10% average of the past four years. It is also significantly lower in comparison to the US and British private equity transactions. Buyouts account for around 11% in the US and 23% in Britain of all takeovers by value.

 

The biggest buyout deal during 2014-15 was Blackstone’s acquisition of the chemical unit of Orica. The deal was worth around $654 million.

 

Buoyant IPO Market, Less Interest for New Deals

 

The Australian private equity industry has seen quite a mixed record in the past few years. On the one hand, firms have been treated with a buoyant IPO market, which has made it easy to find opportunities to exit from investments.

 

A Deloitte report, published on Friday, showed the first half of the year saw private equity-backed IPOs controlling the stock market. 67% of all flotations in the first half of the year were private equity-backed. This is a big increase from the 46% in 2014. Furthermore, firms didn’t list in bad conditions, as the average return for these listings stood at 19.6%.
But on the other hand, the competitive market, together with the reasons mentioned above, finding new deals have been less interesting and lucrative. But Yasser El-Ansary, the chief of AVCAL, said in an interview with the Australian that the lack of deals is also partly explained by the strong IPO activity. Firms have simply devoted a lot of time in exiting investments and are now starting to be ready to look more aggressively into new investments.

 

“The focus now is on new investment opportunities and for those that have capital to deploy or are raising new capital – that’s where the energy and attention is,” El-Ansary told the newspaper.

 

Focus on the Regulatory Environment

 

Minter Ellison’s report, as well as analysts views, also point out that the industry needs to pay close attention to regulatory environment. Yasser El-Ansary has mentioned that it is important the group works closely to ensure the talk on fees and tighter regulations doesn’t become a burden for the Australian private equity firms.

 

Part of the problem in closing deals has been the so-called ‘information gap’, where non-executive directors and chief executives of listed companies don’t share the same information about the company and its finances. El-Ansary told the Sydney Morning Herald that, “I don’t see it as resistance, I see it very simply as an information gap”, one that could be overcome by focusing more on private equity’s investment thesis and how to ensure the companies understand this.

 

The issue of fees is also likely to be a hot talking point at the AVCAL conference. Many Australian private equity firms are currently undergoing some type of analysis of the fee structure and it’s likely some firms will consider changing their fee strategies in the near future.

 

Clive Boyce, portfolio manager at South Australia’s Funds SA told the Sydney Morning Herald in March that the current 2% management fee and 20% performance fee structure is “hard to shake off in boardrooms as anything other than expensive”.

 

Volatile Markets Can Provide More Opportunities

 

The Australian private equity industry isn’t too concerned about the recent volatility on the stock markets. El-Ansary told the Australian, “If anything, the volatility helps more than people might expect”.

 

Small- and mid-sized companies in Australia are quick to look towards the stock market for equity and often have overlooked the opportunities of private equity financing. But the current environment could mean some of the companies re-think their strategies and turn to private equity as the favoured financing strategy for second phase expansion.

 

Although Australian PE funds are sitting on an estimated AU$7 to AU$8 billion of dry powder, the lucrative exits have certainly helped keep fundraising activity strong. Australia’s largest buyout firm, Pacific Equity Partners, has reportedly closed its fifth fund at AU$2.1 billion.

 

Investor appetite isn’t surprising as the country’s firms have been able to provide better returns to listed equities. AVCAL and Cambridge Associates’ data shows private equity returned 13.3% over a five-year period, while listed equities returned just 8.3%. Furthermore, the year to March saw funds return on average 25.7%, while the overall return for S&P/ASX 300 stood at 13.9%.

 

This could mean an influx of better investment opportunities. The firms are certainly ready for it. If you’d like to see deal opportunities in Australia, check out the DealMarket platform.

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