AVCJ Awards 2018: Firm of the Year - Mid Cap: Quadrant Private Equity

Q: Several of Quadrant’s recent exits – including Icon Group and The Real Pet Food Company, which generated multiples of 3.2x and 3.4x, respectively – have been sold to consortiums featuring Asian buyers. To what extent is this a new trend?

A: It’s been growing, I wouldn’t say it’s a new thing. It’s not for every asset either – it’s where there is some logic to having an Asian or international bar. Businesses become more interesting to these buyers because we grow them to scale or for other strategic reasons. There are a lot more trade and M&A within the region; we are seeing that happen across the board, not just in private equity.

Q: At the same time, some Australian portfolio companies are expanding into Asia…

A: We’ve opened gyms [under the Fitness & Lifestyle Group] in Thailand and we continue to roll them out there and in other parts of Southeast Asia. Then the Timezone business, which has things like 10-pin bowling as well as a children’s education concept, has 400 locations in Southeast Asia and India. Both companies have a strong platform in Australia – in terms of management, systems, and knowhow – and we see emerging markets in Asia as the next growth leg. As people get more spending power, these are businesses we can put into shopping malls. There are very good tailwinds.

Q: What are the major challenges in terms of cross-border execution?

A: Every country has its own legal system and cultural barriers, and then there are various other issues you need to consider, not least of which is being able to find local management that is aligned with you. Some of these businesses are a long way in terms of communication and management, and so not being able to manage them effectively is the biggest risk. In some countries you need a local partner and in others you don’t. There are pros and cons to each approach, you must be flexible.

Q: Several of your portfolio companies – Rockpool Dining Group as well as the gyms and entertainment platforms – are well suited to shopping malls. How powerful a differentiator is this in Australia?

A: We have several very strong branded consumer-focused businesses that we can put into malls. It means we can go to the mall owner and say we can draw foot traffic to your property. That is attractive to them because they might be looking to rebalance and bring in other concepts and products and services in response to what is happening with online retail. We end up having a corporate relationship with the mall owner that drills down to the company brand level.

Q: Has there been any change in how you source and structure deals, i.e. partnering with founder-entrepreneurs and creating platforms to achieve scale?

A: Where we are today is a function of the team. We have one of the most experienced teams in the market and the five partners have been working together for a long period of time. I’ve been with Marcus [Darville, one of two managing partners] for more than 20 years. We haven’t been an overnight success. It has taken time to build the team and then get a sense of what is a Quadrant deal and what is a good deal, so that we are completely aligned. We’ve always done platform deals, that hasn’t changed. From a macro perspective, it is about finding businesses that will benefit from tailwinds and be winners tomorrow. Having the owner-entrepreneur staying on as a minority investor – as was the case with Canberra Data Centers, Icon and Real Pet Food – helps deliver that alignment. They might not be running the business, but they are still aligned with you in terms of the knowledge and history of that business and adding value to it. 

Q: You appear to be doing more secondary buyouts…

A: It ebbs and flows. Sometimes secondaries come back, perhaps because the IPO window is shut, but it is a function of the market, not necessarily us as one player in the market. We have always done secondaries and I think we good buyers of businesses in that sense. Other GPs can trust us: if we are interested in something, we do the work and we do exactly what we say we’ll do. 

Q: In the case of Great Southern Rail and Junior Adventures Group, the selling private equity firms retained a stake. Do you see this happening more often?

A: One of the attractions of doing that is you get the business to a certain scale that suits your size of fund, and then you can bring in a partner that contributes more capital and maybe some M&A activity. That partner has some credibility in being able to deliver exits and you participate as a minority investor. It’s not for everyone – some firms like to sell out completely and that’s fine – but if you can stay involved and make another turn on the investment, then why not? It comes down to selecting a partner that can deliver on the value creation and we consider ourselves to be a good partner.

Q: Is the middle market sweet spot changing, given that you might do any number of bolt-on acquisitions?

A: With co-investment we can move up and down. If we conclude that a deal doesn’t need much follow-on capital the initial check can be close to the maximum from a fund perspective. If it needs a lot of capital, we might bring in a co-investor up front and then continue to offer co-investment alongside the fund. The key is structuring investments so that they aren’t disproportionate to the fund size.

Q: Do you come under pressure to increase the fund size with each vintage?

A: The last three or four funds have been substantially oversubscribed, but we’ve stuck to the fund size we set. We must be disciplined about that because we know where we want to be in the market – it’s not just about fund size, it’s about sensible deployment of capital. We don’t to get caught creeping up in fund size and find ourselves out the space we want to operate in. 

Q: Your investment periods tend to be about two years. Why not raise twice as much money and deploy it over five years?

A: Because we would end up managing a portfolio of 15 investments rather than seven. We prefer to deploy capital over a shorter period of time, but also grow investments quickly and divest some of them quickly. The IRRs on our funds are quite high because we have that shorter cycle from deployment to realization. If we had a larger fund and 15 investments, the cycle would be longer.

Q: How is the competitive environment evolving in Australian private equity?

A: There aren’t many PE houses today in the middle-market space. We have a A$1.15 billion fund ($825 million), while others are in the A$500-600 million range, but that doesn’t mean we aren’t competing with them. A bolt-on for us might be an investment for them. However, there are other forms of competition that might be more of an issue than other GPs. A company could go for an IPO or a sale to a trade player instead of working with private equity. But I think the greatest challenge we face is inertia – convincing an owner or operator to do something rather than nothing.

Q: What about LPs going direct? Several superannuation funds want to move in this direction…

A: We haven’t come across this very much. It will be interesting to see how it plays out. There have been quite a few instances over the cycles where people have gone into direct investing rather than through a manager and they have ended up with very sub-optimal results. When you look at the spectrum of fund managers, from fixed income to listed equities to infrastructure, private equity is probably at the far end where you need a very hands-on approach. That’s why the fees are what they are. If an LP wants to go direct, it will need the right structures in terms of incentivizing people to have that hands-on dedicated approach. I’m not saying it can’t be done, but in the past, a lot of people haven’t been able to make it work.  

A year in the life of… Quadrant Private Equity

Quadrant Private Equity’s past 12 months have been punctuated by three stand-out exits: trade sales were completed for Icon Group, Zip Industries, and The Real Pet Food Company, with money multiples of 3.2x, 3.3x, and 3.4x, respectively. These returns were delivered in the run-up to the Australian GP launching its ninth mid-market buyout fund. The vehicle was substantially oversubscribed, with a first and final close of A$1.15 billion ($825 million) coming towards the end of 2017. The process was concluded within seven weeks of opening the data room. As for investments, Quadrant laid the foundations for new platform plays in the candy and family entertainment spaces.

Pictured: Marcus Darville of Quadrant Private Equity

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• Topics
• Australasia
• Buyouts
• Trade sale
• Australia
• Quadrant Private Equity
• AVCJ Awards