AVCJ at 25: Bill Ferris & Joe Skrzynski of CHAMP Private Equity

Buyouts require infrastructure: lawyers, accountants, consultants and bankers to identify targets and conduct due diligence, negotiate contracts, advise on audits, create debt structures and provide financing. Until 2000, no leading Australian banks had a dedicated PE team, but once they grasped the industry's potential, resources were put on the ground. Other service providers followed suit.

The missing piece of the infrastructure was skilled management teams that could be parachuted into portfolio companies post-acquisition. With time, suitable individuals emerged, increasingly mid-career refugees from public companies who had become disenchanted with heavy regulatory burdens and risk-adverse boards. In many cases, these executives ended up taking personal risks, leaving the safety of listed companies to run private firms for less money.

"The shortest commodity isn't the debt or equity, it is access to good management, but today we see serial executives working through" says Joe Skrzynski, founding partner at CHAMP Private Equity. "In the past, when we looked at a potential situation but there were doubts about existing management, we couldn't do a deal. Now we are fairly confident we can attract the management talent that might be missing into the deal at fairly short order."

He claims that more than 250 executives have earned in excess of A$1 million ($1 million) working for CHAMP portfolio companies. It is a statistic that shows just how far the private equity firm has traveled in its 25-year history. Originally known as Australian Mezzanine Investments (AMIL), the firm attracted commitments totalingA$30 million from four superannuation funds - one state and three corporate - for its debut fund. A staff of three proceeded to make investments of A$1.5-4 million.

Early starters

Skrzynski and co-founder Bill Ferris, who now serves as CHAMP's chairman, can trace their experience with the asset class back to 1970, when the former was making direct investments on behalf of a wealthy industrialist while the latter started Australia's first VC firm. "We were working parallel at that time and there wasn't a lot of activity," recalls Skrzynski. "It really got going in the 1980s when there was a bit of government support for early-stage investing through various schemes."

AMIL's early funds offered everything from early-stage to management buyouts - an acknowledgement of the fact that Australian LPs were getting their first taste of the asset class - but the industry began to mature rapidly. In the mid-1990s, funds were typically A$50-150 million; when CHAMP I Trust reached a final close in 2000, it had a corpus of A$500 million.

The jump in fund size was partly a product of increased international interest. Indeed, CHAMP I Trust and its successors arose out of a joint venture with Castle Harlan, a US-based private equity firm. Castle Harlan's presence helped attract international capital from the likes of HarbourVest Partners and a few North American pension funds. These foreign players in turn encouraged Australian superannuation funds to support the asset class.

"What also caught the eye was that the fund was dedicated to mid-market buyouts," says Ferris. "We had to convince ourselves and our investors that if we raised a fund of that size then demand for capital would follow. It was a pioneering phase during which we drummed up demand by encouraging intermediaries, consultants and bankers."

They ended up completing 10 management buyouts, including the purchase of mining and infrastructure materials manufacturer Bradken for A$48 million in equity in 2001, and pay-TV operator Austar, acquired out of bankruptcy for approximately A$67 million in equity one year later. Both companies were exited via IPO, generating money multiples for the PE firm of 3x and 6x, respectively.

CHAMP Buyout II Fund closed at A$950 million in 2005, nearly twice the size of its predecessor but still considerably oversubscribed. Around the same time, global buyout firms were arriving in Australia in force and over the ensuing two years, they tapped into the hyperactivity present in other developed markets. Suddenly Australia was the leading buyout location in Asia. "The debt side of the business became looser than it should have been," says Ferris. "Big or small, deals were overpriced and overleveraged."

As a mid-market firm, CHAMP was largely unscathed by the inevitable fallout. While foreign syndicates were willing to provide debt financing at 9-10x EBITDA, domestic banks didn't go beyond 6x. Now the entire transaction might be priced at 6x EBITDA and private equity firms ask the banks for a debt multiple of no more than 3x.

However, the global financial crisis was problematic for the third CHAMP fund. It launched in August 2009 with a target of A$1.5 billion and, even though a number of LPs wanted to invest, their ability to act was restricted by uncertainty within existing portfolios, which in turn impacted liquidity. The fundraising process took 15 months, about twice as long as the previous fund.

"Very few people were open for business, but the good news was that there was no one else in the waiting room," says Skrzynski. "We certainly got a lot of attention and, although not everyone was in a position to invest, two sovereign funds re-upped with us and we were the first commitment they had made to a GP in 12 months."

One factor that arguably worked in the firm's favor was a tendency among LPs to classify Australia as part of Asia when making geo-fund decisions. Allocations to the region are increasing, largely driven by a desire to boost emerging markets exposure, and Australia adds balance to the portfolio: As a leading commodities exporter, it benefits from growth in Asia, yet offers a rich vein of buyouts and a transparent market that isn't widely available elsewhere in the region.

These ties to Asia are something that CHAMP is keen to exploit as it nears its fourth decade. The private equity firm was the first - and is still the only - Australian GP to establish an office in Asia when opening up in Singapore four years ago, initially to support the expansion of existing portfolio companies.

However, earlier this year, CHAMP completed two regional deals: a $1.05 billion joint investment with Castle Harlan and Lime Rock Partners in Shelf Drilling, a Dubai-based shallow water drilling services company that has exposure to Southeast Asia; and the A$199 million acquisition of a 33% stake in Singapore-based shipper Miclyn Express Offshore.

"These deals are only available to us because we have that cross-border capacity," says Ferris. "We have always been actively engaged in Southeast Asia - we did the first US dollar-denominated IPO in Asia when Datacraft went public in Singapore in 1997 - and in the decade ahead Australian private equity in general will become more engaged with Asian markets."

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• Topics
• Australasia
• Expansion
• Buyouts
• People
• Australia
• Growth capital
• buyout
• CHAMP Private Equity
• William D. Ferris
• Joseph Skrzynski