Ask any Australian GP to name the key trends in 2010 and the bounce-back in debt availability – and debt syndication – will be near, if not at the top of their list.
“The most significant trend in the Australian private equity landscape in 2010 has been the re-emergence of the banks and their increased willingness to lend to leverage buyouts on a significant scale,” says James Carnegie, a partner at Sydney-based Archer Capital.
“For much of the last three years you have only really been able to obtain leverage from a core group of banks – another trend of the last quarter has been the re-emergence of syndicated debt,” states Julian Knights, managing partner at Sydney-based Ironbridge, although he caveats that by pointing out leverage multiples are still significantly below the levels reached in 2006 and 2007.
With debt again a feature of the market, 2010 has seen activity levels in the Australian private equity market pick up after what one GP referred to as the “lost years” of 2008 and 2009.
Carnegie cites July’s Healthscope transaction as the “best evidence” of all of this. At A$2.7 billion (equivalent to €1.81 billion and $2.34 billion when the deal was agreed in July), the acquisition of hospital chain Healthscope by global private equity firms The Carlyle Group and TPG Capital was the largest buyout seen in the country for two years and set the seal on the return to health of the industry.
The public-to-private, which received approval from Australia’s Foreign Investment Review Board in September, followed 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.
Other deals of note so far this year have been 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.
Still, GPs and other industry onlookers are quick to downplay the significance of this rise in activity.
“Things are normal now: not overly strong, not weak either,” states David Jones, managing director at CHAMP Private Equity.
EXITS STILL ELUSIVE
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, after a two-year hiatus, exits are the number one priority. However, it is exits that – unfortunately – are still proving the hardest type of transaction to execute.
Following a brief opening 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, Australia’s IPO markets have been pretty much a no-go since February 2010.
As such, many would-be exits that started the year as dual-track trade sale/IPO processes ultimately became trade sales. 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.
While a sale to a Chinese – or other Asian – buyer is increasingly becoming a valid exit route, corporate Australia has proved far from acquisitive, and so 2010 proved to be the year of 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.
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 as a natural consequence of the number of mature 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).
Looking at next year and beyond, the next hurdle facing the Australian private equity industry is the wave of debt that will come due in 2011 and beyond.
“The bulk of the bigger deals made in 2006/07 have five-to six-year maturities,” says Credit Suisse’s 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.”
As such, Archer Capital’s Carnegie anticipates seeing “a range of secondaries and ‘no money out’ IPOs” as private equity firms employ a pragmatic approach in the face of limited options and unavailable original investors.
“Private equity firms with long tails of legacy assets will be forced to make some unpalatable choices,” he predicts.
But that is for next year. 2010 will be remembered as the year debt returned to the market and the market returned to business.