Australia Report: Country boys face the music?

Australia’s domestic managers have, as a whole, fared pretty well on their home soil. According to data compiled by the Australian Private Equity and Venture Capital Association, an industry organisation, Australian private equity funds have outperformed the domestic public markets over the last one, three and five years. For example, private equity net returns in the 12 months to June 2012 outperformed the ASX/S&P 300 by 11 percent.  

On average, Australia funds have generated about a 2.5x return on a continuous basis, which for a developed market is highly desirable, according to several industry sources. Indeed, over three and five-year time horizons, Australia’s fund managers had higher returns than their counterparts in the US, Europe and Asia, according to AVCAL data, which compared several global private equity indices.

“The returns in Australia are higher and with less variation than any other market we’re aware of,” says Tim Sims, co-founder of Pacific Equity Partners, Australia’s largest domestic firm. 


Skillful use of home-field advantage has helped the industry achieve these results. The local manager has typically developed strong connections with investment bankers, advisers and entrepreneurs (via eating, drinking and golfing), helping him to outmaneuvre foreign managers on certain deals. He has typically sourced capital from domestic LPs who understand the country’s pros and cons (and probably have offices nearby) – so has had no compelling reason to look beyond Australia for funds.

But that model is under threat. Country managers are facing several challenges as intensifying integrative forces spread through the region, reshaping everything from fundraising to exits. 

On the face of it, greater regional integration represents an opportunity. Currently more than 70 percent of Australia’s trade (or $446 billion) is with Asia, up 20 percent in the last two years, according to government data. Surging outbound M&A by Chinese companies and record offshore deals by Japanese companies ($111 billion last year) are boosting the pool of potential cross-border acquirers. The 2015 ASEAN free trade agreement, which is expected to provide tariff-free trade for much of Southeast Asia, already has SMEs doing preliminary work on regional expansion.

“Companies in Australia definitely want to expand in Asia,” says Ben Gray, managing partner and head of Australia, Japan, Korea and Southeast Asia at TPG Capital.

Yet not all of Australia’s country managers are set up for regional expansion – whereas global and pan-regional firms clearly are. Navis Capital Partners, for example, is a Southeast Asia-focused firm that has done two Australia-related deals: the expansion of Australia’s Dome Café across parts of Asia, which yielded a 3.8x money multiple on exit in 2007, and bolt-on acquisitions for Singaporean company King’s Safetywear, which delivered a 4x return in a 2011 sale to US corporation Honeywell. 

Strategic buyers love playing Asia off an Australian base. They like the corporate governance and business culture, and get a play on Asia at the same time 

Michael Alscher
Crescent Capital Partner

“Where we want to be distinctive is taking the company that needs to expand out of Australia and into Asia,” said co-founder Nicholas Bloy, in an earlier interview with Private Equity International. “That has been a good value-creating theme for us.”

Some local GPs sensing opportunity have been addressing the issue creatively. A few have built up a strongly-performing local businesses, with the intention of a secondary sale to a pan-regional firm or a trade sale to a corporate strategic who would take it into Asia.

“A way to wring exit potential from a business is by building an Australian company with very good growth and cash flow, with a demonstrated beachhead in Asian growth markets,” says Stephen White, managing partner at fund of funds Quay Partners. “It’s very good for offshore trade sales and offshore private equity sales.”

One example is PEP’s 2011 sale of poultry producer Tegel Foods to Affinity Equity Partners, which has subsequently rolled the business out across Asia. 

Another model is that of Crescent Capital Partners, which targets Australian businesses with broader regional potential. Crescent has helped portfolio companies do a number of add-on acquisitions in countries such as India, China and Malaysia, says co-founder Michael Alscher. For instance, in 2010, its local team was sent to India to help National Hearing Centre expand there. After opening 15 clinics, Crescent sold NHC to Italian hearing device distributor Amplifon for $472 million.

“Strategic buyers love playing Asia off an Australian base,” Alscher says. “They like the corporate governance and business culture, and get a play on Asia at the same time.”

CHAMP Private Equity has been another pioneer. In 2008, the firm opened a Singapore office to support its Australia-based portfolio companies. “We have a strategy based on trying to drive earnings of our businesses through operations and business development initiatives,” says Ben Sebel, CHAMP’s managing director. “We felt exposure to Asia was critical for many of our companies.”

A breakthrough came last year, when CHAMP became the only Australian firm to do separate deals from an offshore office. Both acquisitions, which are among the largest in its current fund, were done in the oil and gas sector: a $1.05 billion investment in Dubai-headquartered Shelf Drilling International together with Castle Harlan and Lime Rock Partners and a $190 million stake in Singapore-based Miclyn Express Offshore.

Previously the firm had done only add-on acquisitions from Singapore. Sebel expects more regional deal activity – provided it has an Australia angle and “a sensible connection to what we’ve done historically”.

Eventually, CHAMP could become Australia’s first pan-regional firm. At the very least, it cannot be called a country manager any more. It’s a model other domestic firms could follow as they are increasingly pulled into Asia.
“We found [the offshore strategy] is a great differentiator,” Sebel says. “I do get a sense that LPs are really focused on genuine value add and that naturally businesses in Australia have got to have engagement with Asia. We need to be better integrated into the region.”

Other firms are not convinced, however. “Certainly for as long as I’m a managing partner, we’re not opening an office outside of Sydney,” Peter Wiggs, managing partner of Archer Capital, told PEI recently. Wiggs believes there are too many differences and not enough similarities between the various countries. “There are many capable local operators in those markets. If Archer was trying to deal in one of these other markets, we’d just be the dumb money.”