Australia’s PEP reaches $1b first close on Fund V

PEP has 18 months from the date of the first close to reach a final close but a source familiar with the situation said it would be "very surprising" if fundraising wasn't completed by the end of the year.

Previous reports stated that the private equity firm was looking to accumulate A$3.5 billion, comprising A$2 billion in core equity plus a further A$1-1.5 billion for a co-investment pool. This is broadly accurate, but putting a precise figure on the co-investment portion is difficult because it is discretionary.

PEP raised A$4 billion for its fourth fund in 2007, with A$2.7 billion in core equity and a A$1.3 billion supplementary fund. Capital from the supplementary fund was channeled into co-investments on a non-discretionary, pro rata basis.

LPs - many of whom were not set up to conduct rapid due diligence on co-investment opportunities - were awarded a slice of all deals above a certain size, paying no fees on their commitments. In Fund V, LPs have the opportunity to vary the scale of their participation for different deals, but co-investment privileges are limited to a relatively small group of institutions.

"Rather than a pro rata allocation where every investor takes a piece of the core and a piece of the supplementary, PEP now has something that is more reflective of the current market where you have a number of groups with co-investment capability that are keen to apply that," the source explained.

The GP's strategy remains unchanged - it seeks to buy underperforming market-leading businesses with enterprise values of A$250 million to A$1.2 billion.

With a corpus of A$2 billion, the fund would be expected to commit up to A$250 million to an individual deal, which would cover acquisitions with an enterprise value of A$500-600 million. For deals that fall into the A$600 million to A$1.2 billion segment, co-investors will make up the shortfall on a discretionary basis.

Successful co-investment deals from Fund IV include cleaning and catering contractor Spotless, which PEP agreed to take private in April 2012 following a protracted and somewhat contentious pursuit. The enterprise valuation was approximately A$1.1 billion and the equity portion was almost entirely covered by the core and supplementary funds, with a small amount of direct co-investment from the market.

Spotless' profits are said to have doubled since the acquisition - it posted a net profit of A$16.5 million for the second half of 2011, the most recent publicly disclosed data - and the company is expected to re-list this year. Another PEP portfolio company, credit-checking firm Veda Advantage, went public last December is currently trading at a more than 80% premium to its IPO price.

With Quadrant Private Equity closing its seventh fund - and fourth as a fully independent entity - at A$850 million in January, Australia PE fundraising already stands at more than $1.7 billion for 2014, based on funds that have reached a partial or final close. This compares to $474.8 million for 2013 as a whole.

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• Topics
• Australasia
• Fundraising
• Buyout
• Australia
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• Pacific Equity Partners