The five-year run of the Australian dollar has put it close to parity with the US dollar – resulting in lower prices for offshore deals and higher returns for foreign LPs with country exposure.
But it has a downside for the country’s export-related businesses. Less than $30 million has been invested in the manufacturing sector by private equity firms since 2010, according to data from Thomson Reuters.
“The underlying performance of our portfolio companies has not necessarily been assisted by that strong dollar,” says Paul Evans, chief operating officer for Ironbridge Capital. “It has been a mixed blessing for Australian GPs.”
The vast array of cheap imported goods produced in lower-cost China, Vietnam or Thailand has also impacted the domestic manufacturers. “Australian producers are competing with a higher cost base, even though they’ve got the advantage of proximity,” says Gareth Banks, director at CHAMP Ventures.
As cheap competition takes domestic market share, there’s often a knock-on effect: businesses look to preserve their margins by cutting back on discretionary spending, including media advertising.
CVC Capital Partners’ $1.8 billion write-off last year of struggling Nine Entertainment was, in part, the result of a huge drop in car manufacturers’ media buying from Australian TV networks, according to Morningstar senior equity analyst Tim Montague-Jones.
Retail in Australia is especially hard to invest in. The structure of the industry makes it difficult to get consistent returns. We’ve had mixed returns so we wouldn’t be rushing back
“[CVC] bought it right at the top of the market; then we had the global financial crisis and companies stopped spending on advertising, especially in the automotive sector – and that really hit all the TV operators over here,” he says.
The strong currency has also impacted the retail sector, as consumers struggling with high levels of household debt have become increasingly wary of buying luxury or designer retail products. “There is a big focus on everyday cheap family items, and this is what Woolworths and Wesfarmers are focusing on,” Montague-Jones says.
The valuation of iconic surfwear brand Billabong, for example, has plummeted. In July 2012, TPG’s rejected bid was A$695 million (€591 million; $728 million); last month Sycamore Partners and Billabong board director Paul Naude bid A$287 million.
Ben Sebel, managing director at CHAMP Private Equity, adds that retail can be a tricky sector, in particular because importing retailers benefit from the strong Australian dollar. “Retail in Australia is especially hard to invest in,” he says. “The structure of the industry makes it difficult to get consistent returns. We’ve had mixed returns so we wouldn’t be rushing back.”
The strength of the dollar has done less harm to Australia’s mining sector, however. While a slowdown in mining and related services has occurred, Australia is still a relatively low-cost producer in this sector, where some domestic firms are global leaders. Mining also offers seasoned management teams and technology that’s considered advanced intellectual property, sources say.
But cyclicality remains the key problem with any commodity-related play. “You do have to be very careful both of what you pay and at what point in the cycle you are,” Sebel points out.