Q&A: Adamantem Capital's Anthony Kerwick

Q: What has been your biggest challenge since launching Adamantem in 2017?

A: One of the things that we've worked hardest at is building the team. In relatively short order we've assembled 25 people, all from different backgrounds, with an investment team of 16. It also includes dedicated professionals who work with portfolio companies on an ongoing basis in terms of operational improvements and ESG [environment, social and governance]. We've deliberately built our team so that we have deal-related and business-related skills, and the right mix of emotion and rationality. Only a small number of us had previously worked together closely for a long period of time. We've worked quite hard to align people's values and strategy and establish a cohesive unit that is positioned to work effectively.

Q: What type of people do you look to recruit in order to build a balanced team?

A: Our investment strategy is to collaborate with management teams and other shareholders to create value through taking calculated risks in a prudent and responsible manner. To fit that objective, we need strong numerical and financial analytic skills; business and investment experience across a wide cross-section of industries, business types, and business problems; and people that are able to get along and work effectively with lots of different stakeholders. You won't get all of those skills in every person, and we've tried to build a team that complements each other across those skill sets. We have some people that have had careers running businesses, some from the world of consulting, and some with relatively long careers in private equity.

Q: What kind of deals do you find most compelling?

A: The pipeline of opportunities that we look at roughly resembles the Australian economy. They tend to be domestic-oriented businesses with some exposure to international markets, especially Asia, and they also tend to be somewhat consumer-driven and service-oriented. These might be privately-owned businesses with more than one shareholder that have developed divergent objectives or agendas, where we can invest as part of a solution to enable the business to grow. We also look for opportunities to invest in small public companies that are going through a change or are finding that life as a listed entity is not conducive to their business plan. 

Q: How do macroeconomic factors affect your investment strategy?

A: The Australian economy has been a bit of a world outlier for a while now, with almost 30 years of uninterrupted economic growth, and the longer it's gone on the more people have started to focus on when a downturn or slowdown will come and how bad it will be. There is some sign at a high level of slowing growth, although it's still positive, and while there are relatively high levels of private debt in Australia, government debt is still relatively low. As a whole, there's probably still room for more stimulus in the economy than in some other markets. Nevertheless, we do think it's a time to be prudent and focus on businesses that are robust, likely to be around for the long term, and capable of surviving periods of economic softness. 

Q: How do the investments you've made so far reflect this approach?

A: A good example is Hygain, which serves a reasonably specialty market of premium horse feed. It was founded over 30 years ago by Greg Manley, and his fellow shareholders were a family member and a close friend. When we met Greg there were three growth opportunities facing the business. Two required significant amounts of capital that not all shareholders were willing to commit, and one required a set of capabilities that the team didn't have. We were able to acquire the shares from his other shareholders, build some real executive capability, and help expand the business from where it was historically very strong in the southern states of Australia into the northern states. We even set up a beachhead on the west coast of the US. 

Q: What role does Asia play in your view of the Australia opportunity?

A: One of the advantages we have in private equity is being able to focus on the micro issues and look for opportunities to invest where a business can take tangible, specific actions that will outweigh any of the waves and ripples that they might experience in the global economic environment. We're seeing a lot of opportunities in this part of the world where companies are exposed to growth in Asia, in particular. One example is the set of companies that have integrated supply chains into multiple parts of Asia, and that's an important part of them being able to provide high-quality goods at low costs, even if they're delivered mainly to the domestic market in Australia.

Q: What other opportunities does Asia offer to your portfolio companies?

A: A rising number of mid-sized Australian companies that can export goods, and increasingly services, to growing markets north of Australia. Lots of people have a preconception of Australia as a big mine, but the country's exports of healthcare and education are right up there in terms of size and importance to the economy, and we see that growing over time. The third main area of exposure to international markets is through the lens of potential acquirers based in Asian markets that are looking to access knowhow or intellectual property, or just exposure to an Australian business with growth opportunities in Asia.

Q: What have you done to build strong relationships with LPs in your first fund?

A: Even though some of us are relatively experienced professionals, it's not lost on us that investors in our first fund took a leap of faith. We're working hard at delivering on the trust that they've shown in us. It's about consistency – we try to clearly articulate what our investment strategy will be and the way we'll go about our business, and we're trying to deliver that quarter-in and quarter-out. Hopefully over time that will generate confidence in investors that we do what we say and we're true to what the label says. I think an important part of doing that is regular and transparent communication with investors.

Q: How important is co-investment?

A: Bringing in LPs that have active co-investment programs brings two advantages. First, it enables us to look selectively at slightly larger deals than we would otherwise be able to do, and that gives us a little bit more flexibility. Second, and probably more importantly, it allows us to continue to support companies we have invested in with further capital, and for a longer time than we would otherwise be able to. If you look at Zenitas and Heritage Lifecare, we've done three or four bolt-on acquisitions for one and more than 10 in another, and we've managed to tap into our LPs' appetite for co-investment to help us fund them. Without that we would have been forced to look for external capital or to sell before we would have liked to.

Q: How significant do you expect this kind of follow-on investment to be in the remainder of the fund?

A: Fund I is about two-thirds deployed, and we think we've still got another primary investment or two in it. Across the six investments that we've made, we've already deployed significant capital beyond the first transaction. For us, when the opportunity presents itself it's a good use of capital. We're investing more into a situation that we've already done the diligence on for months and months, we've gotten to know the management team, and we're comfortable with the team's business strategy. It's a better risk-return way of investing than looking for a new deal.  

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• Topics
• Australasia
• GPs
• Buyouts
• Buyout
• Australia
• Adamantem Capital
• Co-investment
• Economy