AVCJ Awards 2021: Firm of the Year – Mid Cap: Quadrant Private Equity

The flurry of dealmaking that followed the close of Quadrant Private Equity’s fifth fund – and eighth overall, including the captive years – in late 2017 reflected several consumer themes: the consolidation of fragmented industries; selective expansion beyond Australia and New Zealand; and bringing traffic to shopping malls under pressure to counteract the rise of online retail.

The gyms, restaurants, and entertainment centres that characterised this approach were all hit by pandemic-related lockdowns. Even as customers returned with the reopening of the economy – supporting Quadrant’s belief that it was investing in essential services, given the degree of consumer discretion was relatively low – the private equity firm has become more cautious.

“We have probably moved to a more defensive orientation given the environment. That consumer-experience thesis has been impacted by COVID, but importantly we are seeing these consumer businesses bounce back quickly. And demand remains very strong,” said Alex Eady, a managing partner at Quadrant. “Consumer investments will remain a pillar of our portfolio, although the way we deploy those products may evolve.”

Investments made from Quadrant’s flagship mid-market fund over the past year capture this dynamic. Deals accounting for the tail-end of Fund VI and the beginning of Fund VII include primary healthcare provider Fullerton Health Australia, early education and childcare business Affinity Education, and project consultancy TSA Management.

The consolidation theme is still there, but all three investments are supported by non-cyclical megatrends. Stability of funding is another common characteristic. Users of both Fullerton and Affinity receive government support, through childcare subsidies and universal health insurance, respectively, while TSA consults on capital works projects for government and private sector clients.

“With TSA, there is exposure to huge infrastructure spend on Australia’s east coast, as well as pre-COVID and post-COVID commitments from the government to create jobs. It represents a suitably long-term macro trend with a government counterparty, and we liked that,” said Eady.

Going direct

At the same time, Quadrant invested in My Muscle Chef, which represents a technology-enabled evolution in the typical consumer model. The company sells around 20m pre-packaged meals every year to an online customer base of more than 90,000. In the past two years, revenue and customers on weekly subscriptions have grown 5.5x and 3x, respectively.

Quadrant identified the opportunity through bottom-up research, initially driven by developments in its existing portfolio. First, the potential for health and nutrition-oriented offerings like My Muscle Chef was evident in demand patterns among the 800,000 members of Fitness & Lifestyle Group, Australia’s largest gym chain, which the PE firm constructed as a platform investment in 2016.

Second, My Muscle Chef advocates a direct-to-consumer (D2C) approach, delivering 70% of its meals to the customer’s doorstep. Quadrant has backed several D2C companies through its growth fund, notably Adore Beauty, an online beauty products retailer that went public in late 2020.

“We like D2C because we own the customer, we don’t rely on retailers or other traditional distribution channels,” said Eady. “We see more pureplay D2C opportunities as well as traditional businesses pivoting to D2C. The challenge of the model is achieving scale and finding companies with a trajectory that is attractive to buyout.”

Nevertheless, D2C is filtering through from growth to buyout funds. The former was introduced as means of acting on opportunities – sourced through Quadrant’s advisory networks – that were being overlooked due to minimum cheque size constraints. But there appear to be synergies between the two strategies as well: the growth fund explores new ideas that influence decisions at buyout level.

Quadrant has raised new capital across both strategies in the past year, defying COVID-19-related complications to complete each process within eight weeks. Fund VII closed on AUD 1.24bn (USD 938m) in December 2020 and a second growth vehicle of AUD 530m followed eight months later. The firm raised AUD 1.15bn and AUD 400m in the previous vintage.

“COVID certainly changed the fundraising process in that meetings were virtual rather than physical. Given the LPs know us well this was not really a hurdle and in fact probably streamlined the process if anything, particularly for scheduling,” said Chris Hadley, Quadrant’s executive chairman.

Only one new investor was admitted to the latest buyout fund. There were also a few new faces in the growth vehicle, which was previously raised solely from existing buyout LPs. The strength of the returns that underpin Quadrant’s popularity were confirmed last year when it became the first Asia-based manager to make the top 10 of the HEC-Dow Jones Private Equity Ranking.

Exit options

The seven new investments completed during the 12 months ended September 2021 (four for the buyout fund, three for the growth fund) were accompanied by two partial exits by IPO (Adore and care dealership Peter Warren Automotive) and one full exit (diagnostic imaging business Qscan).

Demonstrating exits from Fund V was helpful in laying the ground for the latest fundraise, Eady noted. In addition to Qscan and Peter Warren, disability services provider APM and experiential tourism business Journey Beyond were sold in 2020 and early 2022, respectively. Three companies remain. More recently, customer experience provider Probe CX (Fund VI) was exited to KKR.

Quadrant generated a near 3x return on Qscan, having acquired a 48.8% stake in 2017 and worked with the partner doctors to grow the company’s network to 72 clinics. The GP’s position was taken out by Infratil and HRL Morrison, which bought 70% of the company at a valuation of AUD 735m.

It is one of numerous recent examples of infrastructure managers targeting core-plus infrastructure assets – known for stable income streams, but requiring some operational involvement, and generating returns that fall in between infrastructure and private equity.

“These tend to be large-scale, structurally supported businesses, often government-funded, with high barriers to entry and portfolios of physical assets that are hard to replicate,” said Eady.

Quadrant has exited businesses with similar characteristics in the past, such as Canberra Data Centres, which was sold to Infratil and Commonwealth Superannuation Corporation in 2016. Last year, cancer care provider Icon Group – which Quadrant sold to another private equity consortium in 2017 – was acquired by EQT via its global infrastructure fund.

As the list of business types deemed appropriate for core infrastructure funds lengthens, it’s conceivable that Fullerton Health will be targeted. The possibility of raising separate pools of capital so these assets can be retained rather than sold off has been discussed, but it might be seen as odds with the focus on velocity of capital that is responsible for much of Quadrant’s success.

“We talk a lot, internally and externally, about the velocity of our business – raising capital, deploying capital, and working hard to return capital. That really drives our economic model,” said Eady. “The opportunity set is broad, our brand is strong, we have a loyal set of investors that have supported us for many funds.”

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• Topics
• Australasia
• GPs
• Australia
• Quadrangle Group Asia
• AVCJ Awards