Exploding the myth

It was fashionable not so long ago to talk about the “decoupling”of Western and Eastern markets, such was the degree of faith that the fast-growth economies of China and India in particular could be self-sustaining in the event of financial meltdown elsewhere in the world. At the recent Australian Private Equity and Venture Capital Association (AVCAL) conference on the country's Queensland Gold Coast, the theory was laid to rest. “We're kidding ourselves if we think there's been a decoupling of Asia from the US,”said one panel participant. Speaking specifically of the private equity market, she added: “There has been a slowdown in capital inflow and investment pace.”

In Australia, this slowdown has been more noticeable than elsewhere within Asia Pacific. The country's traditionally modestly sized private equity market took off on the back of a surge of buyout deals in 2006 and 2007, accounting for between a third and a half of all buyout deals completed in the region during those two years. During the nine months to September 2008, however, Australia was only the fourth most active private equity market in Asia Pacific. (A resurgent distressed opportunity in Japan propelled that country to the top of the charts).

Even allowing for the fact that large Australian deals have never been “mega”by the standards of the US or even Western Europe, they have nonetheless had the same reliance on buoyant debt markets. And those debt markets have, of course, all but ground to a halt. A brief recovery of appetite among the banks over the summer months was reported by Australian practitioners to have been dealt a major blow by the market turmoil in September – a case of one step forward and two back.

Delegates at the conference pointed to the scarcity of banks actively lending – no more than a handful of them at any given time – and the more or less non-existent underwriting market. One leading leveraged financier noted that the only appetite currently on the buy-side was for high quality assets that hedge funds under redemption pressure were being forced to sell into the secondary loan market. Primary issuance, meanwhile, had “stalled”.

Speaking of those lenders still prepared to consider supporting buyout deals, one panellist said that three words were uppermost in their minds: “pricing”, “relationships”and “sector”. Arguably, there's not much to be said about the pricing of deals other than that, in today's highly volatile environment, it's extremely difficult to know what's realistic. In terms of relationships, banks are concentrating on doing what they can to keep key sponsors happy – it's not necessarily a time for developing new relationships from scratch. Sector focus, meanwhile is changing – away from the media and retail deals that attracted some lofty acquisition multiples a couple of years back to those in defensive sectors with strong asset backing such as logistics and mining.

For all this, a cheering sense pervaded the conference that Australia would be able to ride the downturn more successfully than most developed economies. The country has seen 15 years of strong economic growth characterised by such things as an export boom, steady investment in infrastructure and low company default rates. While other countries appear headed for recession, Australia looks set for a period of slower growth, but growth nonetheless.

Furthermore, it is evident that the Australian private equity market has already seen a degree of adjustment to prevailing conditions arguably not seen elsewhere. While a recent statistic from Swiss alternative asset manager Partners Group showed average purchase multiples in European deals continuing to increase during the first half of this year, the average multiple in Australia fell from 8.8 times in the first half of 2007 to 6.4 times in the second half (increasing slightly to 6.7 times in the first nine months of 2008).

The financial crisis is now clearly a global phenomenon, and few present at the gathering on the Gold Coast were under any illusions about that. The fact that the conference agenda included a panel discussion on workouts was ample indication that the possibility of future strife within portfolios is not being overlooked in this part of the world. Nor is anyone still embracing the idea that the Asia Pacific region has been conveniently decoupled from the problems afflicting the West. For all that, no-one here was talking of doomsday.