Australia tech: Firmer footing

As an advanced, Westernized nation with high per-capita wealth, Australia is typically considered something of an economic and cultural anomaly in Asia Pacific. However, the country’s core macro development theme – a difficult transition away from dependence on primary industries – is a decidedly familiar story.   

Traction on this front is often cited in the contributions of the local technology sector, including a proud coterie of universities and government research agencies, although critics point to a lack of practical commercialization. This maturing process is now being charted, at least anecdotally, in the emergence of growth and mid-market buyout opportunities in next-generation industries. Recent support for this view can be seen in a A$33 million ($26 million) Series C round for online jobs marketplace Airtasker that was backed by a number of GPs including Exto Partners.

“There’s really a good cohort of businesses coming through the Australian market and we think there’s a massive opportunity because of the quality of some of the teams,” says Peter Hammond, a managing director at Exto. “Five years ago, the management teams weren’t where they are today. We’re getting a lot more entrepreneurs down here who can achieve scale, so there’s a good pipeline of deals.”

We see it as a huge landscape and very underrepresented by the local market – Andrew Gray

Hammond sees Airtasker as representative of a new level of competence in Australia’s technology space. This year, the company’s founders, Tim Fung and Jonathan Lui, joined the 100 wealthiest self-made Australians under 40 years old – a list where technology now eclipses banking and the creators of Atlassian and Campaign Monitor hold the top four spots. 

Climate of optimism

Atlassian raised $462 million when it listed in the US in late 2015 and its founders have since been active supporters of the Australian technology ecosystem, backing a number of venture funds. The success has fueled a more aggressive stance among local PE investors for later-stage companies with the potential to go global. Last month, ROC Partners teamed up with the New South Wales government and pension fund First State Super to launch a $150 million equity fund targeting small to medium-sized enterprises.

“The mood has been incredibly optimistic because everyone feels that we’re just full of opportunity at the moment,” says Kylie Walker, CEO at Science & Technology Australia (STA). “Things have moved along in the last three years, and there is a lot more thinking and work being done in that space. We’ve moved past articulating the problem, and the industry is much more practically focused.”

For STA, articulating the problem has been a matter of bringing together the academic and private sectors with its annual “Science Meets Business” conferences. Early work in this area included reconciling communication difficulties between these two spheres, especially around various parties’ assumed bodies of knowledge and timeline expectations.   

The centerpiece of government support has been a A$1.1 billion innovation agenda, which has precipitated a number of technology-focused fund launches. However, most of the program’s infrastructural proposals, including improvements to R&D tax incentives, have yet to be implemented. As a result, there is concern that as more start-ups graduate to advanced stages of development, an unaccommodating ecosystem will stymie their global ambitions.

Andrew Gray, managing director at Sydney-based private equity firm Potentia, sees promise in this growing pool of companies, especially in the A$50-300 million valuation range.  He cites data from Mergermarket, Dealogic and Capital IQ that tallies 238 technology deals in the mid-market space since 2010, totaling some A$28 billion in enterprise value.

“We see it as a huge landscape and very underrepresented by the local market,” says Gray. “Australia has 47 private equity funds and zero that are specialized in tech or any other area. The adage has been that the reason for that was that the market was not big enough, but it’s less an issue of size than an issue of focus.”

Gray – who previously cut midcap technology deals in Australia for Archer Capital and Francisco Partners – says 61% of the transactions in Potentia’s target market has historically been taken up by foreign firms. This implies an important opportunity for domestic GPs given the travel difficulties of doing cross-border deals in Australia. The sticking point is the ability of locals to match the technology expertise of international investors.

“The market is at a point where for continued penetration of private equity into the general transaction economy, we’re going to need to see specialization,” Gray adds. “It’s the absence of that specialization that has allowed foreign firms to come in and dominate the market historically.”

Know your strengths

Potentia is approaching this opportunity with an inclusive mandate that covers data sciences, regulatory compliance technology and business-to-business software. Other areas considered local strengths include marketplaces, quantum computing and infrastructure related to big data plays such as the internet-of-things. Recent government support for these fields includes the launch of CSIRO’s Data61 research unit, participation in the Square Kilometre Array radio telescope program and the announcement of a national space agency.

Private equity firms hoping to carve out a presence in this environment will have to sharpen their focus on introducing best practice policies to portfolio companies and thinking strategically about inevitable international expansions. This is because technology companies in Australia are generally more inclined to pursue overseas moves early in their development when operational capacities are limited.

Exto is meeting the greater demand for company-building resources by seeking larger investments in a smaller number of companies and therefor playing a more critical role in the later-stage ecosystem. As Australia’s technology scene continues to mature, this philosophy appears set to take hold in the sizeable local super fund industry. 

“Investors understand there are a lot of really great opportunities in the later stage, and they do want to get involved in those businesses,” says Exto’s Hammond. “They’ll see that the way to do that is through later-stage venture capital funds because they’ll be able to get a feel for the company as an LP and then potentially make a direct investment later on by leveraging that relationship.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Australasia
• Technology
• Expansion
• Buyouts
• Australia
• TMT
• Potentia Capital