GOING LARGE DOWN UNDER

It's a good time to be involved in private equity in Australia. One reason can be found in the recent remarks of Macquarie Fund Management's head of asset allocation Robert Credaro, who declared that Australian institutions should lift their allocation to alternatives from a self-imposed limit of typically around five percent to something closer to 20 percent. With this in mind, the timing of the recovery in global public equity markets – and in the appetite for new issues in particular – has been fortuitous.

Current and potential investors, in Australia and beyond, cannot fail to have noticed a sudden boom in IPO activity on the ASX. In the first three months of 2004, there were 81 percent more new issues in the country than during the opening quarter of 2003 – and private equity firms have been among the main beneficiaries of this activity. Earlier this month, CVC Capital Partners and Catalyst Investment Management listed portfolio company Pacific Brands, the clothing retailer, in the largest Australian IPO so far this year.

Having acquired the company for A$730 million (€460 million; $561 million) in November 2001 from restructuring parent company Pacific Dunlop, the two private equity firms are reported to have made a profit of A$1.1 billion on their equity investment: a return of five times money invested. And this has not been the only private equity investment to deliver strongly. In December 2003, Westpac Private Equity's Quadrant Capital Fund made a reported nine times capital invested from the IPO of retirement home developer Village Life. The previous month, newly listed auto parts retailer Repco achieved a reported return of five times money invested for shareholders including GS Private Equity, Gresham Private Equity and Macquarie Direct Investment.

Successes such as these have not gone unnoticed. According to the Asian Venture Capital Journal, 15 of the largest institutions in Australia have pledged to invest a total of A$735 million in private equity in 2004, delivering a considerable boost to the domestic industry. Among the largest of these investors are the Commonwealth Superannuation Scheme (A$266 million), UniSuper (A$256 million) and AMP (A$128 million committed to funds other than its own).

This increase in allocations is obviously good news for fund raising private equity firms such as Champ Ventures, which closed a new A$165 million fund in February (A$15 million ahead of target), and Pacific Equity Partners, which last month announced cornerstone commitments of A$465 million at the launch of a new fund that was targeting a hefty A$1.5 billion in total.

Fundraisings are also set to benefit from last year's introduction of a new Venture Capital Limited Partnership (VCLP) structure designed to attract international investors. This “flow through” vehicle, which aligns Australian venture capital structures with international LP structures, means investors from eligible countries are no longer liable to pay 30 percent capital gains tax. Three funds have so far registered under the scheme: Macquarie Investment Partners IV LP, Starfish Technology Fund I LP and Deutsche Private Equity Fund II LP.

In addition to the improved environment for independent private equity firms, captive funds in Australia are also blossoming due to local banks taking a greater interest in private equity (in contrast to many of their peers in Europe, who have quit – or are quitting – the asset class on account of balance sheet anxieties prompted by Basle II capital adequacy proposals). Existing large captive funds targeting the Australian market include those owned by AMP and the Australian arms of both Deutsche Bank and Prudential.

It is clear that private equity in Australia is growing in terms of both breadth and depth. There are more players and there's more capital too. Last year the country saw the thirdhighest total private equity investment of any market in Asia ($2.8 billion according to the Asian Venture Capital Journal), behind only Japan ($7.3 billion) and South Korea ($3.3 billion) and ahead of the much-hyped markets of China ($1.3 billion) and India ($774 million).

Australian private equity will undoubtedly be helped by recent stock market successes. Savvy investors know though that the IPO window shuts just as quickly as it opens and that exits by this route are seen as the “icing on the cake”. But, at a time when the case for a larger allocation to alternatives is being voiced, the publicity generated by stellar returns from flotations is more than welcome.