Pacific Equity Partners: Consistency is a long game

Focusing on growth and operational improvement is the foundation for generating sustainable and consistent long-term returns, say Terry Miu Neeland, Alex Ovchar, Rosie Johnson and Tim Sims at Pacific Equity Partners.

This article is sponsored by Pacific Equity Partners.

Pacific Equity Partners has been one of the leading PE firms in Australasia for 25 years now. Where did it all begin and how has the firm evolved since then?

Tim Sims

Tim Sims: The journey began in the early 1980s. The core of the founding partner group started out as strategy consultants with a distinctive and daring mission, which was to improve share price and market value for our clients. We worked in Europe, the US, Asia, Australasia and Africa with management teams across the full range of different industries, excluding commodity sectors, where share price is often dominated by other considerations.

As part of the mission, we engaged a global accounting firm to monitor and record the rate of change in value for our clients, and we saw total shareholder returns across this wide range of industries compounding at an average rate of 42 percent per annum over the next two decades. That was exciting and interesting work, and so together with Rickard Gardell, Simon Pillar and Paul McCullagh, who we had met in the investment banking arena, we sought to take this experience and apply it in a different setting. This led to the establishment of Pacific Equity Partners in 1998.

At that time, private equity in a formal sense did not exist in Australia. There was limited financial and legal technology for private equity and no good understanding for international investors as to how the tax regime might operate for these types of funds. Even though we had a well-regulated, thriving economy with a well-developed investment industry on the ground, there was no private equity tradition.

We were able to bring seasoned investors into this new jurisdiction. The engagement of some of the largest and most sophisticated endowments was crucial. We received support from the likes of the late David Swensen at the Yale University Endowment. Mitt Romney, who we had met through our work with Bain & Co, was crucial to providing introductions, encouragement and endorsement for our work.

After 25 years of hard work and experience, we have a team of 70 professionals and currently A$9 billion ($6 billion; €5.8 billion) of assets under management on a platform with five investment strategies. PEP is the largest and by a significant margin the most active local player in the market. There is a reassuring symmetry in the fact that over the last 25 years PEP investments have delivered average gross compound growth of 41 percent – in line with the growth that our foundation team was delivering alongside management teams in the 1980s and 1990s. That is more than 40 years at more than 40 percent returns.

Is there a ‘secret sauce’ for creating value in portfolio companies?

Terry Miu Neeland

Terry Miu Neeland: We are very careful in our asset selection to ensure that we can identify clear potential for delivering meaningful earnings growth. A good example of how we work is an investment in the milling and bakery space, where we acquired the Australian bakery business of a large multinational group.

The business was well run and delivering stable but low growth rates prior to our ownership. We were able to put in place a high-performing management team, who had a history of success and a focus on new products. That was the main driver in invigorating this category across the key channels to market and generating growth beyond the usual population- and inflation-linked trajectory.

An important part of our investment strategy involves pursuing growth through acquisitions and buy-and-build activity, and with the management team we brought two complementary businesses together to unlock material operating efficiencies and cross-selling synergies. The combination of these measures has seen the business double earnings during our hold period.

The common theme across all our investments is an obsession around creating operational excellence in our companies, and it is down to the management team to deliver on that. We trust the management team to grow a business, and that to us is the secret sauce in generating value.

Ultimately, we have a view of the full potential for a business and we will have an outline strategy, but it is the high-performing management teams that we work with who put that vision into reality. This reflects the long-term history and DNA of the firm.

What are the key ingredients for delivering consistent long-term performance?

“Even though [Australia] had a well-regulated, thriving economy with a well-developed investment industry on the ground, there was no private equity tradition”

Tim Sims

Alex Ovchar

Alex Ovchar: From an investment portfolio strategy perspective, the 41 percent gross average return that PEP has generated since its inception is underpinned by a specific focus on consistency of outcomes.

There are multiple ways to get to these averages. For example, in early-stage investing, such as venture capital and growth equity, managers will generally rely on a few investments that deliver truly outsized returns in the 25 to 50 times money outcomes. By necessity, that means money is often lost on other investments.

Our approach to getting to that 41 percent average is the polar opposite. It is grounded in a particular focus on delivering consistency of outcomes. The way we do that is to have a plan to double profits in each business that we buy. These are often mature, stable businesses that are growing profits at a rate of around 3-4 percent prior to our acquisition. We then seek to accelerate sustainable earnings through the value-creation approach that Terry has outlined.

What developments are you seeing around ESG, and what do those trends mean for value creation in private equity?

Rosie Johnson

Rosie Johnson: There is increasing demand from investors to demonstrate how managers are implementing ESG into the fabric of their operations. Since joining the firm, I have sought to build on existing practices and one of our focuses has been on holding regular education sessions to keep the organisation up to speed in this rapidly evolving area.

One of the most noticeable things for me has been the interest across the whole team in how value can be created by delivering results through an ESG lens. In our sessions everyone around the table is eager to understand what the ESG value drivers are, how to assess those drivers during initial deal discussions, and how to enhance value from an ESG perspective.

Something that we will be looking into more at PEP is both the transformative and the incremental value created as a result of positive ESG influences. We have seen a lot of ESG premiums being paid for businesses and there is evidence to suggest that there is both transformative and incremental value creation linked to ESG measures.

One element we are working to understand is how much of the premium is down to ESG measures and how much would have filtered through anyway.

TS: ESG is an increasingly important theme, but a sense of community commitment has always been intrinsic to our culture. Twenty-five years ago, members of the firm led the movement to establish ‘payroll giving’ for the first time in Australia. This has since raised A$1 billion of annuity income for charity. We have also been involved in establishing a wide range of other ventures to improve community outcomes in causes such as education for the disadvantaged, domestic violence protection, slavery rescue and remediation, affordable housing and new initiatives for charitable fundraising. Within the core business we were the first Australian private equity firm to raise a green bond, for example.

Rosie has come in as ESG director to take us on the next step in that journey. If there is something important to be done, to be explored and to be demonstrated in the ESG space, private equity as an asset class has the opportunity to provide a lead in the area and show how to combine profit and community outcomes in the same mission. We are delighted to be working together with our peers in the market to achieve this.

What role does culture play in generating value and focusing on consistency of outcomes?

TS: Integrity, long-term relationships and business understanding are at the heart of delivering deals and serving portfolio company management teams, and those values sit at the core of what we have tried to establish at PEP.

As our firm has expanded and we have grown the team and secured more funds, a transparent culture of mutual learning has ensured that we stay true to our founding values. There is an intense focus on transparency, openness of discussion around our respective skills and how we each improve on these.

Take our investment committee structure, for example. The investment committee for each deal is open to the whole firm, and we won’t proceed with an investment until the vote is unanimous. This ensures that we are all jointly and severally committed to a deal.

An open investment committee gives the space to keep questioning until we are all satisfied, and it is also an education forum for all members of the firm to see the analysis that we are bringing to bear on a topic. Everyone in the organisation can see how we relate to each other constructively in the robust debate that an investment committee necessitates and learn how we work through analysis and build consensus.

It is about combining technical skill with commercial and interpersonal skills. This approach has served us well in delivering the kind of consistent outcomes that we have been fortunate to enjoy.

RJ: I joined the firm just over a year ago as ESG director and I have learned as much from the senior members of the deal teams as I have from our junior team members. Right across the organisation there is a genuine curiosity about ESG and its value-creation potential.

Terry Miu Neeland and Alex Ovchar are directors at Pacific Equity Partners, Rosie Johnson is ESG director and Tim Sims is co-founder and managing director.