For anybody eyeing private equity activity in the wider Asia region over the past couple of months, Australia stands out as the hotspot.
July recorded the country’s biggest buyout in two years: the $2.3 billion purchase of hospital chain Healthscope by US private equity firms The Carlyle Group and TPG Capital after a sustained bidding war which had also attracted interest from other private equity firms including CVC Asia Pacific, The Blackstone Group and Kohlberg Kravis Roberts.
The same month also saw Pacific Equity Partners’ acquisition of the issuer services business of Canadian company CIBC Mellon Trust, which will ultimately be bolted onto its Australian portfolio company The Link Group; the A$650 million sale of pallet maker Loscam by Affinity Equity Partners to China Merchants Group; the A$160 million purchase of media intelligence company Media Monitors by Quadrant Private Equity; the A$660 million secondary buyout of CHAMP Private Equity-backed higher education provider Study Group by US firm Providence Equity Partners; and the secondary buyout of Quadrant Private Equity-backed temporary fencing provider ATF Services by CHAMP.
Nonetheless, GPs and other industry onlookers are quick to downplay the significance of such a spike in activity.
“Things are normal now: not overly strong, not weak either,” states David Jones, managing director at CHAMP Private Equity.
In this ‘normal’ environment, some GPs are finding themselves able to complete transactions they may have been working on for the past 12 to 18 months. For many, exits are the number one priority. However, it is exits that – unfortunately – are still proving the hardest type of transaction to execute.
“In better times we’d be considering exits or leverage recaps, but this is not the right time,” says James Carnegie, a partner at Archer Capital, adding: “Can you get exits done? Yes you can. But the IPO market’s pretty challenging and I don’t think corporate Australia is on a real acquisition spree.”
In fact the IPO markets, which opened briefly at the end of last year to allow exits for TPG Capital’s Myer Group and Quadrant and Goldman Sachs JBWere Private Equity-backed Kathmandu, have been pretty much a no-go since February 2010.
“A lot of the dual track IPO/trade sales have really become just trade sales,” states Mark Stanbridge, practice leader for corporate M&A and private equity at law firm Blake Dawson in Sydney.
Affinity’s exit from Loscam (mentioned above) is one example of this. Back in January, the firm appointed Credit Suisse and Deutsche Bank to advise on a listing, which at the time attracted speculation that it would fetch up to A$800 million. Ultimately though, the firm ended up taking bids from trade buyers and private equity firms including CHAMP and Pacific Equity Partners before selling to China Merchants Group.
However, while sales are happening, the market is still volatile and timing the exit well remains tricky.
“Private equity is looking when to exit to best effect,” continues Blake Dawson’s Stanbridge. “The question for firms is, do we exit now at 6x or wait another three months and potentially exit at 8x but risk the markets going down?”
“What did we learn last year? In such uncertain times there is a premium for readiness – those who are ready can press the button quickly and exit when the capital markets are still open. One thing we’ve seen is that a lot of portfolio companies are just not ready, particularly if a dual track exit path is selected,” says Andrew Thompson, head of private equity at KPMG Australia. “A return is guaranteed through improving the business, but the timing of when to sell is a very important part of the total return. The consistently high performing private equity firms prepare themselves for readiness on an ongoing basis.”
All hail the secondary buyout
One exit option which doesn’t rely on public markets or trade buyer appetite is the secondary buyout.
“Sponsors who completed deals in 2005-07 are now looking at exits, and if the IPO market remains volatile then secondaries are a viable option for them,” says Graham Lees, a director in the Leveraged FInance Group at Credit Suisse.
Relatively new to the Australian private equity market, this year has already seen a couple of secondary buyouts. CHAMP’s sale of Study Group to Providence Equity Partners was hailed in the market as the country’s first ‘major’ secondary transaction and was quickly followed by CHAMP’s purchase of ATF Services from Quadrant.
If secondaries before were regarded with some suspicion in Australia, they are being wholly embraced now as a sign of the maturity of the country’s private equity industry and, also, a natural consequence of the number of portfolio companies that are in the market.
“There’s a relatively good trade growing in secondaries – that’s a material, healthy and new thing in Australia. Is it here to stay? I think so. If you look to the US, it is an example of a market where secondaries have made good returns for successful private equity firms, over a long period of time” says David Grayce, a managing director at Pacific Equity Partners (PEP).
There is also the fact that in a market where debt can still sometimes be difficult to source, secondaries offer more guarantee of securing bank funding. Julian Knights, managing partner at Ironbridge, states, banks are “more comfortable” lending to assets they already know.
If exits remain elusive due to the challenged IPO market and straitened trade buyers, then it is a pretty good time to make new deals for the exact same reasons. And the banks are largely back on board too.
“The beginning of 2010 saw a strong increase in appetite. Banks which had been saying they would do a maximum of $35 million on a deal are now saying $50 million to $100 million,” says Credit Suisse’s Lees.
“The financing side has improved markedly since last year,” says PEP’s Grayce. “There is a list of 30 or so providers who have historically provided LBO debt of one flavour or another: there were times last year when it felt like that group had largely gone away, this year there’s a fuller suite of people open for business and lending.”
That’s not to say that pricing and appetite on debt is back where it was three years ago – “margins are in the mid-400s and anything above 4x senior would be considered very aggressive,’” Lees adds.
There is also the fact that banks – led by the major Australian lenders which tend to be more conservative on pricing and discipline – are being highly selective about which private equity firms they do deals with.
“How sponsors behaved on some of their portfolio companies during the downturn will have an impact on who banks back going forward,” states Lees, adding: “Particularly the domestic banks – and their presence in deals is important at the moment given the relatively small number of market participants.”
In fact, some GPs are talking about a banking “blacklist” – a list of private equity firms which are out of favour and – as a consequence – out of financing options for the time being.
Looking ahead, there is another major test of bank appetite looming: the wave of refinancing due in the next two years.
“The bulk of the bigger deals made in 2006/07 have five- to six-year maturities,” says Lees. “Over the next 12 months there will be quite a lot of focus on this. Sponsors will be focused on exits prior to these maturities, but if an exit isn't a viable option, then they are going to look to recapitalisation and refinancing.”
For the local banks, this will largely be an opportunity to reset the pricing on a deal. However, on some of the larger deals transacted at the peak of the market by foreign GPs, like CVC Asia Pacific’s purchase of PBL Media and KKR’s buy-in to Seven Media Group, some of the (foreign) banks involved in the original financing have now withdrawn from the market, leading some to question whether a refinancing will be possible.
Still, that has yet to play out. For now, GPs are pretty content to be back in a market where they can go about the business of being private equity investors.