Q&A: Pacific Equity Partners' Tim Sims

Q: How has the competitive dynamic evolved in Australia’s private equity industry?

A: A stable and well-served market structure has emerged, and the shape of that market has ensured that, where long-term quality players have succeeded, they have each pursued distinctive and different strategies. The pan-Asian funds for example, have historically targeted large trophy deals, which are part of a broader international market and are funded and valued accordingly. Another segment is occupied by middle market players based on the ground here, each of us have well thought out strategies and therefore tend to pursue different opportunities. The third segment of the market is made up of high quality smaller players, who again each pursue their own proven strategies. Some of the pan-Asian funds are trying now to do smaller deals. So far, those investments have tended to be in high performing companies, with established trajectories, in familiar spaces, and at full multiples. They have been less active in that part of the middle market where businesses with potential, have ugly profits and complicated long drawn out deal cycles. In this space networks, track record, the ability to act as principals, deal stamina and the capacity to deliver real change on the ground, are the vital ingredients in achieving the right outcome.

Q: What about new domestic arrivals? Do you feel there are enough deals to go around in PEP’s segment?

A: Over the years, as new arrivals have tried to find a viable place in the market, there has been a fair amount of turnover. In some sense, the new names are replacing old players that have not found a way through, so the number of players and the competitive intensity has not really changed. There is always significant risk for new players. How will the new team, the opening deals, and the new strategy play out? Will the established competition in the market leave a sustainable angle from a standing start? However, it’s important to note that that the level of PE penetration into local M&A volume remains much lower than in other developed markets. This suggests that, while the industry has grown and is maturing, there’s is still opportunity for further deal activity of the right kind.

Q: How strongly does co-investment feature in your deal flow?

A: Ever since our second fund, going back nearly 20 years now, we’ve had a co-investment component to our program. If deals are too large for the core fund or generate too much concentration in the portfolio, we automatically add co-invest. Just under half our deals attract co-invest and we have deployed in aggregate an additional 50% in co-investment relative to the core fund amount. 

Q: How has co-investment demand developed?

A: Up until Fund IV, co-investment worked on a fixed pro rata basis for all PEP investors – we had a supplemental fund, that was designed to do the job of co-invest and give us flexibility on deal size in the portfolio. In putting Fund V together, we recognized that in an evolving market there are some investors who are either not engaged in co-investment or less hungry for it and others who are very hungry for it and have put in place special teams and processes to maximize the take-up. To meet this need, we have adopted a more modest core fund size, with a tailored approach to individual co-investment partners. It enables us to build direct relationships with relevant LPs and work with each them to place them in the right part of the co-investment experience.

Q: Given Paul McCullagh, one of PEP’s four co-founders, stepped back last year, how do you address questions about succession planning?

A: Our hiring tradition has been to take people at early stages in their careers, who have proven to be strong performers in investment banking or consulting and bring them into the team for an extended apprenticeship. A version of this has been going on for 20 years and for as many years before that, in the consulting business. The standing team is 30 or so professionals and unplanned turnover has been very low. As a leadership group, we are well practiced in transitions by geography, by profession and over time – and we have given a lot of thought to how we do that within the PEP practice. The apprenticeship structure lends itself to an organic process: growing new leaders and building trust in them as the older leaders themselves evolve. We also have a 360-degree review process and a widely distributed profit-sharing arrangement. We are transparent with each other about who is doing what, what the returns are, how we complement each other, and how that is evolving over time. I feel confident that we are institutionalized to the point where healthy steady evolution will occur.

Q: Last year PEP was said to be considering an infrastructure strategy. What came of this?

A: This is the new secure assets fund initiative. A significant number of deal opportunities in Australia and New Zealand have a particular hybrid quality to them: there is an aspect of the business model that generates strong annuity income and there is also a real opportunity to add value. You need a specialist fund for this, because you bid a certain price on the annuity piece and then you need to apply traditional PEP-type skills to unlock the value-added piece and price this option differently. While we have done a variety of these deals in the past, we often see opportunities that don’t work, unless you are able to price the two components of the deal competitively. We believe you need a blended approach. The fund will generate mid-to-high teen returns with a lower risk profile than a traditional leveraged buyout fund. At the current target fund size, we believe it will be big enough to accommodate larger investors, but small enough to generate significant co-investment capacity. We have a number of really interesting live deals that we are currently pursuing and so prospective investors will have an opportunity to investigate specific deals in the run-up to first close.

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• Topics
• Australasia
• Buyouts
• Buyout
• Infrastructure
• Australia
• Pacific Equity Partners