Private equity turned more strategic in 2018, pipeline strong for 2019, dealmakers say

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Private equity players took a more targeted and strategic approach to investment in financial year 2018 after a buoyant 2017, according to a new report.

MinterEllison, in its Directions in Private Equity 2018 report, said that 2018 was a transition year, with fund managers keen on unlocking quality assets via partnerships with founders or management of target companies.

Flexible investment structures are becoming more important, as savvy funds become willing to take a non-controlling interest or provide a more flexible funding solution to convince owners of quality assets, who are reluctant to part with control, to deal. Private equity also continued to look for buy-and-build opportunities this year, the firm’s dealmakers have observed.

“They want to acquire businesses below their ideal equity cheque size, but suitable for thematic investment in fragmented sectors such as travel and tourism, child-care, food and agribusiness,” said Glen Sauer, private equity partner. “Our view is that more traditional buyout funds will face increased competition for assets from investors who are willing to invest across the entire capital structure.”

Australian and foreign fund managers operating in Australia also raised a record amount of debt funds in 2018. The firm said that alternative debt funding benefits everyone involved, providing stable returns in a low-yield environment.

The firm’s dealmakers also see a strong pipeline of deals across numerous sectors in the coming year. The government’s inquiries into various industries are proving beneficial for investors looking to buy, the firm said.

“We are likely to see PE funds looking for opportunities as a result of rationalisation occurring out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and the Royal Commission into Aged Care Quality and Safety,” said Ricky Casali, who is also a partner in MinterEllison’s private equity team. “Major financial institutions may look to divest non-core assets due to diminished risk appetites and renewed focus on their core business. At the same time, the aged-care sector may look to consolidate and partner with incumbents needing capital to meet rising social expectations about the quality of aged care.”

The consumer discretionary and the food and agriculture sectors dominated deals by number in 2018. Packaged food and meats accounted for the majority of private equity activity in the sector in the past year, the firm said. By value, PE deals were dominated by the healthcare and the food and agriculture sectors.

For 2019, dealmakers should expect the small-cap and mid-cap companies, non-bank financial services, operating infrastructure, and IT services sectors to be hot.