Looking for the exit

A joke made at this year's AVCAL conference reflects the most immediate problem in front of an industry facing longer term consolidation – the poor exit environment.

“I’d like to call your attention to the layout of the room in case of an emergency, because as private equity professionals I know that you won’t for the life of you be able to find the exits,” was the opening quip of one speaker at the closing dinner of this week’s Australian Private Equity & Venture Capital Association (AVCAL) conference.

While the line got the laugh it intended, it also reflected what for many firms is becoming an increasingly pressing concern.

According to one panel session at the conference, there could be “north of 50” private equity portfolio companies looking for exit in the next 12 months. This “wall of exits” – the backlog built up during the global financial crisis – is fast becoming urgent as firms anticipate their next fundraising.

But while the urgency is there, the timing isn’t. Though there have been a few notable exits in recent times – Loscam and Study Group for example – conditions on the whole remain constrained.

Corporate Australia is still “sitting on the sidelines”, as one conference panellist put it. The IPO market meanwhile remains all but closed since the notable – or notorious depending on your point of view – Myer Group flotation in October, which allowed a highly lucrative exit for TPG, but left a difficult legacy in many ways, not least of which has been the poor performance of the shares post-listing.

In fact, the only sure way to exit in the current climate, reflected conference panellists, seems to be via a secondary sale to another private equity firm. Tim Longstaff, head of consumer and industrial at Deutsche Bank, told the audience that around 80 percent of all the initial offers for private equity-backed companies he had seen in recent times were from other private equity firms. In second round bidding, some 60 percent of offers would be from private equity firms he added.

“This speaks to both a lack of corporate buyers and the strength of private equity bids,” he stated.

But not every exit can be through a secondary transaction, and the view of Longstaff and other bank advisers was that private equity firms would need not only to be more flexible in terms of looking at their options, but also allow much longer lead-in times to the exit process.

“To get a deal done you need to persistent, pragmatic and realistic on pricing,” summed up John Murphy, managing director at Investec Wentworth Private Equity.

However, the fact remains that there are unlikely to be enough exit opportunities in the next 12 months to clear the backlog.

“Not everyone that wants to get out will get out,” Longstaff admitted.

Elsewhere at the conference, the predictions made recently in PEI Asia magazine's Australian market report (published in the September edition) that GPs were entering a period of consolidation due to a reduction in appetite from their traditional LP base, the Australian super funds, were echoed. In fact, “perform or perish” was the title given to the opening debate on the second day of the AVCAL conference.

In this climate, the pressure to exit existing deals – and exit them well – is even stronger. GPs will need to be among the firms able to clinch exits in the next year in order to demonstrate a track record to LPs that will enable them to raise their next fund and secure their place amongst the industry survivors.

Needless to say, everyone in the industry will be hoping the joke about finding the exits won't be relevant at next year's AVCAL conference.