Australia: Gilbert and Tobin on a year of change

The Australian private equity landscape shifted markedly in 2016 as new players emerged, traditional houses reinvented themselves and Asia made a real splash.

Investment activity rose 2 percent year-on-year to A$3.33 billion ($2.44 billion; €2.25 billion), according to figures published by the Australian Private Equity and Venture Capital Association. But the average deal size rose from A$36 million to A$58 million after a decline in the number of investees to 60, down from 86 in 2015.

The year was characterised by a number of new entrants. One of Asia’s biggest funds, Barings Asia, made its first serious foray into the Australian market with the successful A$1.1bn buyout of SAI Global. SAI had been the subject of consistent private equity interest over the previous two years but Barings was able to execute the largest private equity-led public-to-private deal in five years in double quick time. The deal demonstrates Asian GPs’ growing interest in Australian assets that can be scaled globally.

Bain Capital’s decision to open a Sydney office in 2016 was further evidence of the internationalisation of the Australian private equity market.

Another prominent deal executed by an international fund was the US$1.23 billion acquisition of the Moly-Cop mining consumables business by American Industrial Partners. The infrastructure arms of a number of global funds also participated in the hotly contested bidding process held by the New South Wales Government for a A$2.6 billion concession to operate the State’s land titling service.

Expanding its portfolio of Australian holdings, Bain Capital also undertook a series of deals including the acquisition of complementary childcare providers Camp Australia and Only About Children.

It was also a busy year for the top Australian funds. Australia’s largest private equity fund Pacific Equity Partners continued its spate of food sector acquisitions with the purchase of the Allied Mills joint venture from food commodities giants GrainCorp and Cargill while Crescent made significant investments in the pathology sector.

FUNDRAISING TRENDS
Fundraising was slightly down on 2015, according to AVCAL data, but was spread across more funds and remained strong. Highly regarded local manager Quadrant raised A$850m for its seventh fund. Foreign investors continued to contribute the majority of funds raised, with fundraising dominated by North American investors.

Despite the enormous scale of funds under management through Australia’s compulsory superannuation regime, Australian investment in local GPs remained frustratingly low, with only 17 percent of their funds coming from domestic LPs. We are, however, seeing a marked increase in direct co-investments between Australian superannuation fund managers and local GPs which is helping deals to get done.

Divestment activity was down in 2016 compared with 2015 (which was a very strong year), with 11 fewer exits overall. There were 15 exits via IPOs or post-float sell-downs, including Crescent’s sale of its stake in Metro Glass. Interestingly, Australian private equity backed IPOs outperformed non-PE backed IPOs by more than 15 percent over the preceding three years, according to AVCAL.

Trade sales continued to account for a higher value of exits in 2016 than capital markets deals, AVCAL said. There were also some successful secondary deals, such as Oaktree’s sale of Fitness First to Quadrant allowing the Sydney-based private equity firm to bulk up its fitness business and create Australia’s largest gym group.

HOT SECTORS
Old aged and child care, health, financial services and consumer businesses continued their hot streaks. Health deals included Affinity Equity Partners acquisition of Medical Director, while notable consumer deals included Crescent’s purchase of Tigerlily from Billabong and Allegro’s investment in the Healthy Life store chain.

We’ve also seen the re-emergence of genuine dual track exit processes with a number of local GPs using the strategy to achieve positive exits. Moly-Cop was a dual-track process that ran right to the wire and achieved a great outcome for all stakeholders.

GENERATIONAL CHANGE
The year was marked by a changing of the guard in the industry’s leadership with new management at many of Australia’s cornerstone firms, including the appointment of new chiefs at Carlyle and TPG.

This came as new GPs emerged, led by familiar faces. Former TPG Capital executives Ben Gray and Simon Harle set up a yet-to-be-named new fund which is expected to have a big impact. Gray and Harle are some of Australia’s best known and most successful private equity executives, having led numerous high-profile and successful transactions such as the acquisitions and exits of Healthscope and Myer and the Airline Australia Partners consortium’s tilt at Qantas in 2007.

Other doyens of the Australian industry also moved to establish new funds in 2016. Former Pacific Equity Partners managing directors Anthony Kerwick and Rob Koczkar announced a new fund, Adamantem Capital, which plans to invest in special situations and both listed and unlisted companies. The wide mandate of this fund could see an increase in public markets activity by local funds, opening up the way for more shareholder-activist type strategies. Australia has typically lagged behind the US in this space. Other new players included Archer Capital alumni Andrew Gray and Rishabh Mehrotra who established Potentia Capital.

The arrival of these new funds, coupled with the new generation of executives at established players, is expected to create the most vibrant and active private equity community that Australia has ever seen.

FOOD FRENZY
Food and consumer businesses saw a lot of action in 2016, with Quadrant expanding its food and hospitality holdings business, Urban Purveyor Group, with the acquisition of the Rockpool and Fratelli Fresh groups. Allegro entered the fast food market by purchasing the master franchise agreement for the operation of Australian Pizza Hut stores from US-based parent company Yum! Brands.

PEP built on its Pinnacle Bakery business, with the acquisition of Australia’s largest flour manufacturer Allied Mills to become the latest in its stable of complementary baked food ventures (which includes Banquet Desserts and Patties Foods also acquired during 2016).

On the sell side, TPG successfully floated Australia’s largest poultry company, Ingham’s, while Archer has reportedly been eyeing exit options for its QSR Holdings business, which operates over 600 fast food stores.

Fintech also proved popular, following the lead set in the United States. CHAMP acquired Pepperstone while prominent local fintech companies Tyro and Prospa conducted significant funding rounds that were well supported by private equity.

PUBLIC DEALS
Barings’ acquisition of SAI Global was a successfully executed public-to-private deal – something that had previously proved difficult for private equity. We’ve also recently seen an unsolicited indicative proposal by TPG for Fairfax Media’s Domain and Australian Metro Media (which includes its three keynote publications, The Sydney Morning Herald, The Age and The Australian Financial Review).

There were also a number of approaches and deals for recently listed private equity portfolio companies such as Cover-More (listed by Crescent) which was acquired by Zurich and Spotless (listed by PEP) which is subject to a hostile bid from Downer EDI. Overall, local GPs seem more willing to take a shot at public companies with more innovative deal structures than has historically been the case.

After such a busy year for Australian private equity dealmaking and fundraising, 2017 is shaping to be even bigger with the emergence of so many new players.

This interview is sponsored by Gilbert + Tobin and was published in the PEI Australia Special 2017 in June 2017.