AVCJ Awards 2022: Firm of the Year – Mid Cap: Pacific Equity Partners

Of the 13 managing directors at Pacific Equity Partners (PEP), 12 have spent their entire investing careers with the 25-year-old firm, from the three remaining co-founders to the cluster of investment professionals who joined as associates. This longevity – and the culture of apprenticeship that underpins it – is seen as unusual in Australia and New Zealand private equity.

“We are driving transformation in businesses for periods of up to seven years, so we want a team that is prepared to invest for the long term,” said Andrew Charlier, a managing director who joined PEP from Bain & Company in 2007 and now co-heads the firm’s secure assets strategy.

“You might play a role in sourcing an opportunity as an associate and then stay involved through implementation and exit – and this journey happens several times over. It allows a person to develop, to become part of a culture of performance, which is more long-term in nature than the in-and-out, individualistic approach we often see in private equity.”

Terry Miu Neeland, a director at PEP, has accompanied several portfolio companies from start to finish during her eight years with the firm. She points to Allied Pinnacle – a bakery business acquired in 2015 and merged with flour producer Allied Mills before being sold to Japan’s Nisshin Foods in 2019 – as an early instructive experience.

More recently, Miu Neeland oversaw the exit of iNova Pharmaceuticals, a prescription medicine business where growth largely came through international expansion. A different time, a different industry, but with some consistent themes: targeting underperforming market leaders; devising value creation plans that can double profit; and empowering management teams to deliver.

“The common piece across deals I’ve worked on is having a strong relationship with the management team and helping them develop their strategic goals. Our approach is very inclusive, and it has built up over a long time, and that shines through in how we work with these teams,” said Miu Neeland.

“Being part of the asset selection and being the point person who interacts with management during the investment process has, for me, been a very important part of career development.”

Strategic significance

PEP aggressively realised the fruits of these labours in the 12 months ended September 2022, closing five exits and signing two more, with an average return of 3.9x. It also made three new investments, signed another two, and helped portfolio companies complete eight bolt-on acquisitions.

However, these numbers alone do not capture the strategic significance of the period. Two of the exits came from PEP’s debut secure assets fund, demonstrating the viability of investing at the nexus of private equity and infrastructure. This created helpful momentum for Fund II, which launched with a target of AUD 1bn (USD 702m) but is now aiming for AUD 1.4bn.

The private equity firm also built out two more strategies: capital solutions, which involves making structured non-control investments of AUD 25m-AUD 150m that deliver a 10%-12% IRR – compared to the AUD 200m-AUD 1bn enterprise values and 20% IRR for buyouts; and PEP Gateway, which gives individual investors access to private equity funds globally with a regular liquidity mechanism.

“We ask ourselves three questions. First, does PEP have an edge where we can apply our skillset to achieve strong, consistent results. Second, are our existing investors supportive of it? Third, is it beneficial and synergistic to the wider PEP platform? If the answer is yes to all three, we will respond,” explained Alex Ovchar, a director and co-lead of the firm’s partner and client group.

“Secure Assets had that perfect overlay of taking the existing PEP skillset but applying it in a new, more defined vertical relative to our existing Buyout strategy.”

The origins of the secure assets strategy can be traced to PEP’s early investments in companies like distributed power provider Energy Developments (EDL), which generated consistent infrastructure-style yield and offered additional upside through an active management approach. EDL proved successful but other opportunities were foregone largely due to cost of capital issues.

“Twenty years ago, what we call secure assets was all private equity. About seven years ago, the distinction began to break down as new pools of capital formed globally to go after assets that sit between infrastructure and private equity. It became clear there was a risk we wouldn’t be able to capture these opportunities – or we could raise a dedicated fund to pursue them,” said Charlier.

This trend dovetailed with the emergence of energy transition. Replacing fossil fuels with renewables or diesel with battery power promised long-term savings but involved massive up-front investment. Moreover, these onerous capital requirements would remain as businesses accumulated scale.

A thesis proven

The first secure assets fund closed in 2020 with a corpus of AUD 660m, including AUD 300m in committed co-investment that PEP could allocate to deals at its discretion. By then, a debut deal had long since been completed: PEP carved out Origin Energy’s smart electricity meter business and combined it with a similar unit under Landis+Gyr. The enterprise value on entry was AUD 397m.

“There was an opening in the digitalisation of energy – being able to track energy consumption and manage intermittent generation. A couple of the smart meter players were owned by industry incumbents that didn’t have capital to deploy against them, so they came up for sale. We partnered with one to buy the other,” said Charlier. “The real opportunity was to go for scale and go for it quickly.”

At the time of acquisition, Intellihub – as the business became known – had 750,000 units, most of them on Australia’s east coast, and Origin was the primary customer. PEP expanded the business to 2m units with more than 30 counterparties across Australia and New Zealand. In addition to diversifying the revenue base, contract tenor was lengthened from 3-5 years to 10 years-plus.

In four years, not only had Intellihub’s market share grown from 20% to 50%, but the asset had been de-risked. It was becoming core infrastructure – with a different risk-return profile to the secure assets fund. Brookfield Asset Management bought a 50% stake at an enterprise value of AUD 3.2bn last year and the other 50% was transferred into a single-asset continuation fund. PEP’s return was 5.2x.

“As the business began to scale up and de-risk, we talked to investors and the feedback was that they would be keen to come in on a partnership basis rather than do a 100% sale. When they saw the results from Intellihub, they were keen to stay in and they wanted us to stay in, it was just a case of doing that with a different style of return and a different investment horizon,” Charlier said.

The second secure assets fund exit saw PEP generate a 7.2x return from the sale of Winconnect, a provider of utility services to multi-tenanted buildings, to Origin. At the same time, Origin’s master services agreement with Intellihub was amended and Origin and Winconnect agreed to sell their embedded network meters to Intellihub.

Energy transition is the dominant theme under the secure assets strategy. The Fund I portfolio also includes Zenith Energy, an off-grid electricity provider not unlike EDL that needed capital to convert thermal power plants to renewable energy, but other investments play indirectly into the theme.

Agright, for example, builds and operates poultry farms for chicken processing companies under long-term contracts. It is an agricultural infrastructure play, but PEP is introducing standalone power systems, having calculated that using a combination of solar and battery power, plus a small amount of diesel, works out cheaper than buying electricity from the grid.

Charlier believes the transition happening in distributed or off-grid energy will spread into traditional energy, further increasing capital needs. “We look for businesses that are EBITDA negative when you subtract the capex requirement – they have more opportunity to deploy capital than their existing base allows,” he added. “That’s what we are investing in because we can drive very material growth.”

Picking winners

PEP’s three exits from its buyout funds were medical devices distributor LifeHealthcare, which went to Ebos Group, corporate hospital platform Evolution Healthcare, which was acquired by QIC and Sunsuper, and automotive parts supplier AutoPacific Group, which was picked up by GUD Holdings. The firm also agreed to sell iNova and Patties Foods to TPG Capital and PAG, respectively.

It is consistent with the even split between sales to strategic players and sales to financial sponsors that PEP has witnessed in recent years. During a period in which public markets have been hard to access, financial sponsors have effectively taken the place historically occupied by IPOs.

Meanwhile, new investments have come in familiar sectors: hospital operator Healthe Care, health and wellness brand Cranky Health, and Agright. “We tend not to follow the hottest sectors, but if you look at our investments over the past two decades, the sectors we’ve done more in are consumer, healthcare, and education,” said Miu Neeland.

There is a clear preference for defensive sectors, in addition to market leaders within those sectors. Miu Neeland observed that, although 2021 and early 2022 proved an opportune time to realise returns, none of PEP’s exits would have been possible if the companies in question were underperforming – and careful asset selection is a key part of the process.

She pointed to iNova, which initially struggled during COVID-19 because one of its flagship products is cough medicine and social distancing measures impacted the circulation of common colds. The company rebounded quickly and TPG was suitably impressed by the quality of the platform and its growth potential that it looked past recent volatility. (PEP also re-invested through its latest fund.)

Ovchar added that realised returns from all PEP’s buyout investments for 2010-2020 are in a narrow range of approximately 2x-4x, with no losses, and an average realised gross IRR of over 40%.

“It’s all about consistency – picking high quality, mature businesses where there is scope for transformation and a tangible path to doubling profits,” he said. “We don’t follow the whims of the market. We want to do in the next decade what we have been doing for the past decade.”

Maintaining the firm’s culture and supporting the development of investment professionals as they move through the ranks is regarded as essential to these efforts. It is accompanied by a commitment to diversity that has resulted in an associate-level group that is nearing gender parity. There are also initiatives focused on retention, including mentorship programmes and training on unconscious bias.

“We want to build people’s careers with them, under the apprenticeship model, and so it’s important we address some of the challenges around diversity in our industry,” said Miu Neeland. “We want to be market-leading and we are making some good progress, especially at the junior level. However, we must ensure we are constantly checking ourselves and creating the best environment for people.”

Pictured: Shannon Wolfers of Pacific Equity Partners at the AVCJ Awards

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• Topics
• Australasia
• Buyouts
• Trade sale
• GPs
• Infrastructure
• Australia
• Pacific Equity Partners
• AVCJ Awards