Australia’s lower mid-market retains its appeal

More than half of the A$475 million ($485 million) that CHAMP Ventures raised for its seventh fund, which closed at the end of last month, came from overseas investors. The foreign share of the private equity firm's previous vehicles was less than 1%. The impact such a turnaround has on the investment professionals tasked with pitching LPs shouldn't be understated.

"I collected a significant amount of frequent flier points - we had to go to the US and Europe 5-10 times during the fundraising process and then to Asia and the Middle East quite a bit as well," says Gareth Banks, a director at CHAMP Ventures. "There are extra travel costs but it's more about the amount of time you spend on the road."

Foreign investors are an established presence in larger funds: Pacific Equity Partners (PEP), founded by a group of ex-Bain & Company executives, had ties to US LPs from the outset and the foreign share of its most recent fund was about 80%; Archer Capital, whose origins are entirely indigenous, has gradually seen the overseas portion of its funds come into the majority.

For small- to mid-market players like CHAMP Ventures and Archer Capital Growth Funds the transition is more recent. The latter firm, which recently closed its second vehicle at A$300 million, still has 60% domestic investors but the foreign share is up significantly from the preceding fund.

This rebalancing wasn't unexpected. Australia's domestic fundraising landscape has been in a state of flux for a couple of years now. Some superannuation funds have retreated from private equity for due to concerns about fees; others have merged and are in the process of reviewing their asset allocations; still more are diversifying private equity commitments and putting more capital with international managers at the expense of domestic players.

"If you look at our Fund I investors, we had a very good level of re-ups in Fund II but clearly some investors were under pressure to scale back support to the asset class," says Craig Cartner, managing partner at Archer.

Diversification drive

In this context, it is impressive that both CHAMP and Archer managed to finish above target, each having spent about 12 months in the market. CHAMP's corpus is split between pension funds (40%), fund-of-funds (28%) and sovereign wealth funds (15%). Asia accounts for the largest geographical contribution, with 25%, while the US and Europe and the Middle East are on 20% and 11%, respectively. Archer also saw the most interest among Asian and US investors.

Identifying suitable LPs is not easy. As one Asia-based placement agent notes, a North American institutional investor might have a $50 million minimum ticket size and a 10% cap on its total commitment to a single fund; clearly not appropriate for a GP seeking to raise less than $500 million. CHAMP hired MVision to place the fund while Archer - which has traditionally steered clear of agents - operated alone, although the LP relationships established by its buyout affiliate came in handy.

"The process takes longer because you are competing for capital with all other PE firms globally and the investor base doesn't know you as well," says CHAMP's Banks. "You have to explain about the merits of the Australian economy compared to other jurisdictions and the benefits of the segment in which you are investing."

Cartner adds that foreign investors were generally receptive to opportunities in Australia's small to mid-market buyout space, partly because it is a very clear investment thesis - privately-owned businesses with an enterprise value of A$20-150 million that need growth capital or assistance with succession planning - that has worked before. CHAMP typically pursues expansion and replacement and buyout opportunities in firms with enterprise valuations of up to A$200 million.

Neither claims to have favorite sectors, instead focusing on good management teams. While Archer invested in Fuelfix, which serves mining companies and related infrastructure providers, its portfolio is by no means dominated by commodities boom conduits. As for CHAMP, there is a willingness to invest in growing retail niches - women's fitness and leisure apparel brand Lorna Jane is a portfolio company - despite general wariness of the struggling sector.

Big picture

Fundraising in Asia Pacific as a whole is challenging. According to AVCJ Research, fewer than 100 funds achieved a close in the first half of 2012, raising a collective $22.3 billion, the lowest level since 2009. In what is widely described as a flight-to-quality scenario, GPs with track records and stable teams are managing to prevail, regardless of the national market.

For Australia specifically, it could be argued that private equity firms benefit from LPs' desire to have exposure to the Asia growth story but with a different risk-return profile than that normally associated with emerging markets.

"It comes back to being very clear about the market in which you are investing and your place in it," says Archer's Cartner. "We were able to articulate that during the fundraising process."

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• Topics
• Fundraising
• Australasia
• Fundraising
• Australia
• CHAMP Ventures
• Archer Capital