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

The leading US venture capital firms do little in the way of marketing for their funds. In certain cases, fundraising means dividing up allocations among LPs that have already expressed a desire to re-up. New investors might struggle to get involved, regardless of their keenness.

Australia's Quadrant Private Equity appears to be entering this territory. Fund VI, which closed at A$750 million (then $746 million) in 2010, spent about six weeks in the market. Earlier this year the GP raised A$850 million ($758 million) for Fund VII and the process was completed in just over a month.

Marcus Darville, a partner at Quadrant, puts this speed down to several factors. First, the performance of previous funds has been good. Second, the firm is disciplined about size, working to the principal that a genuine middle market strategy for Australia and New Zealand requires a fund no larger than A$1 billion.

Third, existing investors are loyal, with around 80% of the Fund VII covered by Fund VI investors, despite an element of churn within the Australian LP community as certain groups scale back their private equity exposure. Fourth, Quadrant keeps its terms and conditions fairly simple.

"Some existing investors put their hands up before we start fundraising so they get a lot of the work done in advance," Darville adds. "They aren't in possession of the fundraising documents, but they can come up the curve pretty quickly. A typical international investor wouldn't normally be able to tick all the boxes within four weeks."

This is the second Quadrant vehicle that has been open to international LPs. Fund VI was two thirds domestic and one third international; Fund VII is more or less a 50-50 split.

Resisting temptation

Staying disciplined on fund size can be a challenge for GPs that receive a lot of interest from prospective investors. Expanding the corpus well beyond the prescribed level means more fees but it might also necessitate a change in investment strategy in order to deploy the capital. Performance may ultimately suffer as a result.

"We pick a fund size that we think is optimal for the market. But it is also important that LPs apply a similar discipline themselves and don't turn a A$400 million fund into an A$800 million fund because they are all trying to get in," Darville adds. "There have been cases in which LPs have piled in and encouraged a manager to be in a completely different investment space to that one that made them successful. That can be dangerous."

Quadrant itself has seen a few jumps in size across the vintages since the firm was founded in the mid-1990s as Westpac's private equity arm and - from 2005 - as a fully independent operator. Fund III, for example, was raised in 2001 and had a corpus of A$125 million. It has delivered a gross IRR of 94%. Two vintages later, Quadrant was managing a A$500 million vehicle, rising to A$750 million for Fund VI.

The economic situation and the private equity opportunity in Australia and New Zealand have changed substantially since 2001, so A$125 million is no longer appropriate. Darville gives one overriding reason for the sharp increase from Fund V to Fund VI. First, nearly every deal in Fund V had an element of LP co-investment so the size and type of transaction pursued didn't change much between the two funds.

Quadrant has realized investments quite rapidly, with Fund V now 90% exited and on course for an investment multiple of close to 3x. Thanks to an 18-month period of bullish capital markets, four of the seven companies that make up the Fund VI portfolio have been fully or partially exited.

There have been IPOs for Burson Auto Parts, APN Outdoor and Estia Health, while City Farmers was sold to Greencross in a cash-plus-stock deal. None of the three remaining investments are much more than two years old.

Although Australia's IPO market is cyclical - there have been 16 PE-backed IPOs on the domestic bourse so far this year, compared to 10 for 2010-2012 combined - Darville believes there is now sufficient momentum that a single weak offering would not derail it. That said, Quadrant looks to keep its options open.

"We usually try and target businesses where we have a longer-term growth path - there is something in it for the next buyer. That hopefully gives you more than one exit. In our entire history we have probably exited more companies through trade sales than IPOs, but it's fair to say that, as our fund size has increased, the bulk of the assets are the right size to go public."

Middle market focus

When Quadrant makes the investments, however, the companies it targets are mostly not ready for an IPO. Residential aged care services provider Estia, for example, had 1,100 places across 10 facilities when the PE firm bought a controlling stake in the business. Through a series of bolt-on acquisitions, it now operates 39 facilities with approximately 3,200 places.

This is an important strategic distinction given the strong capital markets are taking away potential private equity investments at the large end of the scale as much as they are facilitating IPO exits for managers. Quadrant has completed two deals this year, which is consistent with its typical three-and-a-half year investment period per fund. Again, fund size discipline - and remaining resolutely middle market - is important.

"The larger part of the market is always a bit more erratic and then more recently it has had the added problem of the IPO market being a strong competitor," says Darville.

"We do a lot of deals with private vendors who often roll over equity with us. It helps that we have been successful building companies and taking them to IPO because these vendors are often rolling over substantial equity. They want to be comfortable that we can steer the company to a good exit."

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• Topics
• Australasia
• Fundraising
• Quadrant Private Equity
• Australia
• Fundraising
• AVCJ Awards