Australia sees rise of spin-outs

The private equity industry Down Under is undergoing a generational shift, with a crop of new groups emerging from established players.

As Australia's almost 25-year-old private equity industry matures, spin-outs from existing firms are becoming more common.

“We've seen a new generation of private equity firms start where the older firms began, raising smaller funds and focusing on smaller deals,” Steven Hall, chief executive of placement agency Brookvine tells Private Equity International.

One example is Adamantem Capital, a firm founded in July 2016 by Anthony Kerwick and Rob Koczkar, who were managing directors at the country's largest buyout firm, Pacific Equity Partners. The pair was instrumental in delivering much of the early track record for PEP, having managed more than 10 investments from 2004-14. Adamantem is said to be nearing a A$600 million ($450 million; €400 million) final close for its debut fund, most of it from superannuation funds. 

Fellow debutant Odyssey Private Equity, helmed by Quadrant Private Equity co-founder George Penklis and CHAMP Ventures executives Gareth Banks, Jonathan Kelly and Paul Readdy, collected A$275 million for its first fund in February. The latter left CHAMP Ventures after it wound down the firm due to succession planning issues. Odyssey will invest between A$15 million to A$40 million in mid-sized companies, where the firm is seeing strong dealflow, Penklis says.

“With private equity firms raising larger funds and moving out of the segment, we saw an opportunity and received strong investor support for the fund.”

Jason Cachia, previously a director at Quadrant, set up Evolve Private Capital in late 2015. The firm operates on a deal-by-deal basis and backs businesses in the sub-A$50 million space. Meanwhile Ben Gray, TPG's former Asia head, is said to be launching a new fund in September. An industry insider tells PEI is targeting about A$2 billion, has his team in place, and will target larger deals, “putting it into the same echelon as the pan-Asian funds”.

According to PEI data, the size and number of Australia-based funds has dipped, with 10 funds collecting $5.2 billion in 2014, and just six funds collecting $2.4 billion in 2016. With the new firms in market, however, industry watchers are expecting more buoyant fundraising activity for the rest of 2017.

“It's a natural progression of the young bucks seeking to build and maintain their own franchise,” Hall says. 

However, there are those who view these new groups with scepticism. A Sydney-based general partner tells PEI some limited partners question the firms' future performance. 

“An interesting feedback we get is that LPs wouldn't even look at these new firms because many of the partners only have experience in large buyouts,” the GP says. “They're moving into a different market. It's a different skill set investing in small family businesses, than a carve-out of a large corporation.”

He adds some of these spin-outs have taken a financial hit, accepting LPs who invest in first-time funds because they can negotiate lower fees. Odyssey might be an exception, the GP notes, because it is playing in the same field as it used to.

But as another mid-market GP noted, there's certainly room for more players in the Australian market. Who succeeds will be up to the LPs.