Private equity players are hoping that a surge in corporate activity in the latter part of the financial year continues, with a fall in the value of domestic mergers and acquisitions offset by an uptick in deals led by offshore buyers.
As the private equity industry prepares to gather in Melbourne for its annual conference this week, a survey by the Australian Private Equity and Venture Capital Association (AVCAL) shows while total mergers and acquisitions and private placements completed in 2014 financial year remained at similar levels to 2012-13, foreign buyers made a bigger contribution to deal activity than in the previous year.
“The data tells us there is a very strong pipeline of new deal activity and a renewed sense of optimism that has been absent for quite a few years,” AVCAL chief executive Yasser El-Ansary told The Australian Financial Review. He says the improvement is being driven by the buoyant listed capital market, together with low interest rates, stronger balance sheets and improved business confidence in some sectors.
“The observation we can make from a macro level is that cash is king and cost control philosophies that have dominated the last few years are starting to be replaced by a new focus on growth and expansion opportunities.”
AVCAL chairman John White, also a founding partner at mid-market private equity firm Next Capital, agrees. “Economic activity across the eastern seaboard is picking up, which means increased sales and earnings growth for portfolio companies. This combined with robust exit conditions is leading to some very good results for private equity.”
During FY14, there was a 45 per cent increase in inbound deals, which made up almost half of total deal value. The largest private equity transaction during this period was the acquisition of Telstra’s Sensis business by the US-based Platinum Equity in January.
“The Australian economy has demonstrated a relative strength compared to other markets over the last 12 months – there has been a sense that we have a more stable political and policy environment,” Mr El-Ansary said. “That is critically important when you are making decisions about the allocation of capital over a medium- to long-term investment horizon.”
Private equity also contributed to some of the larger deals announced in FY14, such as KKR’s buyout proposal for Treasury Wine Estates and Pacific Equity Partners’ bid for SAI Global.
Mr El-Ansary points to the financial system inquiry’s interim report in July which identified that small-and-medium sized enterprises in Australia need better access to growth capital funding, in particular venture capital and private equity.
“The financial systems inquiry, led by David Murray, has shown that we, as an industry, need to do everything we can to help make the proposition of putting money into private equity and venture capital as attractive as possible for super funds as well as other investors.”
While private equity has a reputation for ruthless cost cutting, AVCAL argues PE firms improve the companies they take over in terms of business productivity and employment opportunities.
“What private equity can do is where the SMEs are struggling to get bank capital, we can bring capital to work and bring expertise to help turn these SMEs into the leading businesses of tomorrow,” Mr White said.
Private equity deals in Australia made up 6 per cent of all deals in FY14, and contributed 9 per cent of total deal value for the year. This is only slightly higher than the five-year average of 5 per cent for deal volume and 8 per cent for deal value. “That’s interesting because compared to more established offshore markets like the United States and the United Kingdom, the comparative numbers are 25 per cent of overall M&A activity,” Mr El-Ansary said.
AVCAL’s annual conference starts on Wednesday and aside from moving the venue from the Gold Coast to Melbourne, Mr El-Ansary is promising a different event this year.
“We are shifting the design of the program itself towards hearing from the chief executives and founders of businesses that have been backed by private equity over recent years,” he said. “Many super funds have been interested in seeing where their money goes to work – hearing from the business owners and leaders.”
The Australian Financial Review