Not just for the big boys: Private equity back in action

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Private equity funds are widely tipped to have a big year of exits – but lawyers say there is plenty of potential on the buy side too. Renu Prasad reports.

As the heavyweights from global and domestic private equity firms descended on Sydney earlier this year for the Asian Venture Capital Journal’s annual conference, one media correspondent attempted to sum up the general bullish mood of the moment.

“Private equity giants… are seeking to make 2014 either a banner year for exits or acquisitions,” the journalist wrote, hedging his bets somewhat. Still, that ambiguity may be appropriate in the current environment.
While much has been written about the forthcoming Spotless IPO and the potential for more PE exits to come, some commentators believe there are positive signs for acquisitions too.
“We have noticed a distinct pickup in activity in the last six to seven months and we see the pieces being in place for a reasonably strong deal flow for PE over the next year or two on both sides of the equation – exits and new deals,” says Herbert Smith Freehills partner Damien Hazard.

Fundraising figures have been lukewarm. New capital committed to Australian venture capital and later-stage private equity funds decreased by 77% (A$2.4bn) in FY2013, according to the ABS – the largest decline since the Bureau began publishing this data in FY2005.

Indications are that this trend has bottomed out and FY2014 fundraising had already exceeded the FY2013 total by March, according to research by the Australian Private Equity and Venture Capital Association.
Hazard warns against reading too much into these figures.

“It’s such a thin market with a small pool of managers... if four significant managers raise in one year, then that’s the ‘boom’ year for the next five – it doesn’t tell you anything about what’s going on underneath all that,” he explains.

Still, Gilbert + Tobin partner Andrew Bullock points to a number of recent obstacles facing local PE fundraising. The first is a diffidence by superannuation funds in relation to PE because of fee reporting issues.

“Because PE funds charge a percentage based on commitments as opposed to drawn investment funds, the fees appear heavily overstated until the fund is more heavily invested,” Bullock explains.

Other factors include funds rebalancing allocations to other jurisdictions or being “overweight”.

“This was a particularly constricting factor until the last 18 months or so during which time Australian private equity funds have returned billions of dollars to investors through exits and recapitalisations.  With this money returned and the outlook improving, the fundraising outlook for established firms is improving,” says Bullock.     

Commentators are generally optimistic about exit activity - private equity-backed IPOs on the Australia and New Zealand bourses generated proceeds of $3.1bn in 2013 – but acquisitions are less easy to characterise.

In February, Asian Venture Capital Journal noted that there had been a “noticeable drop-off in activity” by PE investors in the mid to upper deal space.  Private equity investment in Australia and New Zealand was worth A$11.6bn in 2013, slightly down on the previous year, but the journal noted that this figure was inflated by one particularly large deal.

“It’s harder to see where the next buy side deal will come from – there’s less of a clear pipeline than all those [anticipated] floats….but the fundamentals are in place,” comments Hazard. “I’d be surprised if we didn’t have stronger levels of buy side activity. There are PE funds with still quite a lot of dry powder. A lot of that dry powder has a clock ticking against it so it has to be spent. There is no doubt that the managers of that equity are very focussed on finding deals.”

Bullock agrees that there is plenty of dry powder in the market. “Quadrant, PEP, CHAMP, and Archer all have money available to deploy,” he says. “The globals – Carlyle, KKR, Blackstone, TPG and Bain always have dry powder and have a broad range of different funds from which they can draw depending on the transaction.” 

While every fund has its own discrete focus, Bullock says some sectors will come under particular PE scrutiny.

“Food businesses with room for growth; general industrial businesses that could benefit from a re-focus and businesses in the health sector should all attract interest this year.”

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