'Australian returns not compelling'

Sparks flew at this year’s AVCAL conference, held in September at the Sheraton Mirage on Australia’s Gold Coast: Jon Moulton, private equity veteran and founder of Better Capital, argued that Australian private equity returns were reasonable, but not compelling – something best not said in-country.

Joe Skrzynski, founding partner of Australian private equity firm CHAMP Private Equity, countered that it was important to take into account the relative immaturity of the asset class in Australia. “The industry started much later than the US and the UK, so it is not surprising to find that there is a shake-out period as the [good GPs] come out on top and others fall away. I think we’re witnessing that right now.”

However, Moulton wasn’t convinced. “My experience of being around in the earlier days of the UK and the US was that the returns were much higher in the earlier days. It is much easier when you’ve got much less competition.”
According to data from Cambridge Associates shown at the event, Australian firms in the top two quartiles have delivered net returns of 12.2 percent in Australian dollar terms over a 10-year period – compared with 16 percent and 17.7 percent in the US and Western Europe respectively.

The debate (which stayed amicable) highlighted an issue that’s top of mind for some of Australia’s superannuation funds. Catherine Nance, head of the retirement incomes and asset consulting group at PricewaterhouseCoopers, says the returns the Supers have received from country funds have not been sufficient.

“Super funds [are asking]: ‘What is the return for the cost we pay [in fees] and is it sufficient?’ With [private equity], there is scepticism in the Super world about the returns they’ve been quoted.”

The row over returns is due to several factors, industry sources say. One is the high multiples fund managers paid for Australia deals during the boom years, followed by the subsequent strained exit environment.
Nikki Brown, managing director of placement agent MVision Private Equity Advisers in Sydney, says that that the ideal 3x return multiple and 25 percent IRR that GPs aim for (and some promised) has not materialised – while at the same time, LPs have become more realistic and increasingly concerned with liquidity.

Another factor is the choice of comparables. For instance, Australia’s private equity returns have beaten its public markets over three- and five-year time horizons, according to AVCAL figures. In addition, over a 15-year period, Australian private equity has returned on average 14.3 percent, while emerging Asia has returned 8.8 percent.

But the Cambridge data cited earlier shows that compared to the US, Australia realisations have slowed in the past couple of years. “That has been of concern for some of the LPs, because they are just not getting the cash distributions to feed back into managers. That is probably more the problem than having great [exit multiples].”