Q&A: Adamantem Capital's Anthony Kerwick

Q: What impact is the coronavirus outbreak having on your business?

A: None of our businesses are particularly exposed to generating revenue from Asia at present. A couple of them have plans to make that a bigger part of their business in the future than it is today. There are some supply chain issues – and we are watching them closely – but we are not the only Australian company with interconnected global supply chains. I think it is just too early to know how it’s going to impact the economy. And I don’t think it changes our long-term positioning or desire to look for opportunities to be more connected in Asia. Unless something changes dramatically, whatever impact it has will be temporary. One of the benefits of private equity is that it can look through things that are worrying markets in the short term and take a three or five-year view. We might see opportunities come out of it later in the year.

Q: What trends do you see emerging in the middle market?

A: One thing we are noticing more and more is businesses with a genuine capital constraint that private investment might help relieve. You wouldn’t have said a decade ago that public companies would experience capital constraints – that’s why they went public in the first place – but smaller players are struggling to get noticed by institutional investors. This is partly a result of active public equity managers leaving the market. At the same time, some mid-size private companies are finding the debt markets tough. We have seen a tightening in bank financing, which makes companies consider working with an equity investor.

Q: Is that shift in emphasis from public to private markets structural or cyclical?

A: There is a genuine question about whether the public equities governance model suits companies that want to go through some form of change. If you have initiatives about calculated risk taking that are likely to be beneficial over the medium to long term but in the short term will result in lower profits because they are reinvesting or higher capital expenditure and therefore fewer dividends, it is unclear whether there will be public market support. Private equity can really play a role here. That might be structural rather than cyclical. But large public-to-private deals as a result of ever larger pools of private equity capital looking for a home, that might be more cyclical. We saw some of that behavior 12-13 years ago and then those investors left the market.

Q: How much competition do you see for deals?

A: Everyone attaches labels to segments to suit their marketing – under A$100 million ($66 million), A$100-300 million, A$300 million and above. Most new firms are in the sub-A$100 million category. We have a wide remit. We say we focus on investing in businesses with enterprise valuations of A$100-300 million but we will look outside that range selectively. When we do that, we see more competition, but I feel the middle part of the market is least changed, with three or four core players.

Q: Are you surprised there aren’t more GPs in your space with institutional funds?

A: No. It’s not easy to raise a fund, especially a first fund. Investors have a lot of choices as to who they invest with and they are very selective. Our experience is that it’s not impossible to raise capital in the local market, but it’s not straightforward either. You must be differentiated or have a compelling proposition as to why, as a new manager, you can do a better job than the existing managers. Australian institutions make up 60% of our investor base and the 40% that are international took a reasonable amount of comfort from the fact that significant Australian investors have supported us.

Q: How reliant are you on intermediaries when deal sourcing?

A: I try to avoid the term proprietary. It implies there is a secret and the company seeking investment didn’t seek any advice – but if you’re the owner of a A$100-300 million business and you don’t get advice when thinking about bringing in a new major shareholder, that would not be wise. Of the six investments we’ve made, only one was a genuine auction process, but most of the time the counterparty receives advice. We prefer unearthing opportunities and getting into a bilateral discussion with the counterparty about how our investment can solve problems. Often, the existing investor wants to retain a meaningful stake in the company, so they care more about our plans and what we are like to work with than the notional value we were attaching to the company.

Q: What does this mean for valuations?

A: Asset prices all around the world in almost every asset class are high relative to history and there are all sorts of reasons for that, not least the extreme experiments in monetary policy we’ve had over the last decade or so. Private equity investing as we define it is looking for opportunities to support companies and take some calculated risks to double value over 3-5 years. We are working to the assumption that when we reach the exit horizon for the companies we invest in, market multiples will have moved down versus where they are today. 

Q: To what extent is Adamantem’s differentiation evolved?

A: I think we are getting clearer about where we want to specialize. We are increasingly focused on two or three sectors – consumer, B2B services, healthcare services – and we are increasingly focused on two types of investment. As we spend more time in these aeras, we get better at assessing opportunities and more people get to know us. At the same time, Adamantem is no longer just the Rob [Koczkar] and Anthony show. We have a team of 25 and our ability to find and execute deals is not so much dependent on us as on the broader group of people.

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• Topics
• Australasia
• Buyouts
• GPs
• Australia
• Adamantem Capital