Given that you are raising an A$300 million country fund, how are LPs responding to the Australian market?
There is an increasing clarity of LP views. We are seeing quite strong views expressed around further investment into the Australian market and it is more likely they’d be interested in the lower mid-market opportunities than larger buyouts.
The last few years have shown that the top end can be challenging on a couple of fronts. Both in terms of dealflow – the number of actual deals that are out there – and competition for those deals has driven prices up. But also we’ve seen the IPO window closed for quite a long period and that has made the exit environment for large deals quite a challenge. On the lower end, people feel far more comfortable about dealflow opportunities. There is more dealflow and prices are not being elevated in the same fashion because there is less competition at that end of the market.
Exits for mid-market deals are not reliant on the IPO market because trade sales and secondaries are viable and successful exit pathways that are still open to us, even in an environment where IPOs are perhaps not available.
Australia’s IPO market has shown much more strength lately – is this likely to attract LPs to buyout funds?
There is no question that the IPO market has shown much better health over the last six months or so and our view is that will continue into 2014. There are definitely fund managers with excess cash holdings that are still very interested in quality IPO offerings, so I think those dynamics are positive at the moment.
But, I think what LPs have witnessed over the past three or four years was a period when that IPO window was not open. That has made them reflect on the challenging environment for exits. No question that the IPO markets are much more healthy and conducive to exits today. But it is a bit uncertain how long that window stays open.
Are high valuations in the mid-market presenting challenges in terms of investing for funds like Wolseley?
We think one of the key attractions of the lower-end of the mid-market, [companies] with enterprise values of under A$120 million, and certainly one of the drivers of LP engagement with this sector, has been that valuations are still very attractive. We’ve had quite a lot of feedback from international investors saying that they’ve started to see valuations creep back up in the US market and that is starting to give them concern.
Investors are very much recognising the strong dealflow within this mid-market space – there are more than 10,000 companies operating in Australia in that A$30 million to A$120 million range and there are a huge proportion of those owned by baby boomers. Over the next five to 10 years there will be a shift in ownership required and statistically there is only a small proportion of those that see ownership transition through the family. Therefore, there is a very real requirement for third-party capital to play a role. We’re a very attractive proposition compared to selling to a competitor that you’ve been going head-to-head with for 20 years.
What sort of valuations are you seeing and are they deemed as fair from a private equity standpoint?
In our space we are typically seeing businesses trade at around 5x-6x EBITDA. That is a very broad rule of thumb. There are opportunities where we can buy better than that and for very exceptional opportunities [it can be] north of that.
There is more of an alignment between buyers and vendors at the moment around valuations than what we were seeing two years ago. I think there was a bit of a disconnect immediately post-GFC where people were feeling there was going to be a bounce back to the days of high valuations, but that feeling has now dissipated.