Q&A: Archer Capital's Peter Wiggs

Q: The pace of deployment for Fund V was initially slow. How has it picked up?

A: Fund V is now 71% invested and on track to be fully deployed in five years, and we will look to launch Fund VI in the final quarter of this year. Conditions for deployment in Australia have improved markedly in the last 12 months or so. The IPO market was the biggest constraint in terms of getting deals done - we were looking at opportunities that were priced 20-30% above what we thought they should be - but following the volatility in March-April of last year that option has disappeared for most vendors. We are in discussions over a couple of assets that were slated for IPO but now the vendors realize that if an offering happens at all it will be at a deep discount. The weakness of the Australian dollar also means there is less of an overlap between us and the pan-regional guys who are managing US dollar-denominated funds. In 2014, they were happy to come down into the mid-market, but now a A$200 million check is a US$140 million check, so they are looking at opportunities larger than we are.

Q: Education and healthcare both feature prominently in Fund V. Why is this?

A: There has been massive under-investment in both education and healthcare by different levels of government and they are looking for the private sector now solve that under supply. While education and healthcare are defensive sectors, solving the under supply is going to play out over 15-20 years. Education - and to a lesser extent healthcare - is also export-driven. As a result of the strong Australian dollar, the attractiveness of Australia versus the UK or USA was halved, and we saw the intake of offshore students decline 20-30%. Now that is rectifying itself and there is strong growth in the education sector.

Q: Do investments in these sectors necessarily involve a consolidation strategy?

A: It goes back to the niche role the private sector has played over the last 20 years, with vocational education picking up the slack where the public sector has not delivered. But as state providers have pulled back, the private sector has grown and there is the potential to create large players. The easiest way to do this, given the revenue model is based on an accreditation from the government, is to buy existing businesses rather than pursing greenfield projects. Healthcare is different because the bolt-on opportunities are just about gone. I would say the real opportunity in aged care, for example, is organic. At Allity we did one large bolt-on quite early on and since then our focus has been on brownfield and greenfield development. The pricing on acquisitions has got to the point where it is not that accretive - you are taking on acquisition risk for little upside.

Q: What other themes are likely to be strong in Fund VI?

A: Business systems deals like Dun & Bradstreet and MYOB. Financial services is interesting given the one-stop-shop integrated model is being regulated out of existence. They are looking at separating distribution and sales, so that financial advisors can't be tied to the people who provide products. That will provide a lot of opportunities. I would also be surprised if we didn't do at least one food or agribusiness deal in Fund VI; we might even do one at the end of Fund V because we've still got two deals to go. The rest is serendipitous. It is easier to say what we won't be doing. I would be very surprised in the next five years if we did a mining services deal or a retail deal.

Q: The aforementioned IPO boom was unprecedented in terms of private equity involvement. Do you see this phase being repeated?

A: Yes. The time before that when the IPO market was running hot in Australia, which was 2006-2007, we didn't have the private equity inventory out there. Most of the offerings to hit the market in 2014 and early 2015 were by companies bought in 2009-2011. Every time the IPO window opens a larger percentage of the offerings will be financial sponsor-backed. We are becoming a bigger part of the M&A pie in Australia.

Q: And yet Archer was one of few Australian GPs not to tap the IPO market during this period...

A: We didn't have any companies to sell - we were down to four companies at one stage and they were pretty much brand new. Also, given the choice, an IPO is the last thing I want to do; I much prefer a trade sale or a secondary. IPOs are painful processes. They are uncertain, and fairly or unfairly there is a reputational risk that follows you for several years afterwards that you don't need. With Healthe Care [which Archer recently agreed to sell to China's Luye Pharma] we had a view for several years on who the buyer set would be and had been methodically engaging with people. When we decided it was time to press the button on a sale process we had a fairly educated view on who the likely buyers were and what values they would contemplate.

Q: Archer Growth, the firm's lower mid-market affiliate, has spun out as The Growth Fund. What was behind the separation?

A: It was always a three-fund deal. In 2006, I reached an agreement with Craig Cartner - who was the initial partner at Archer Growth - and we laid out Funds I, II and III in terms of what the economics and governance would be. For Fund III, we would still have carried interest but other than that they would be 100% independent. When you are trying to start a fund there are synergies to being part of a larger group and the brand name was helpful to them. Now they have built up their own reputation, which is completely independent of Archer, and so they can raise a fund without the Archer brand name. I'm a great believer in commercial relationships being based on the underlying economics of the deal. If there is no additional value accruing to them of using the Archer name then why would they provide me with any economics? And if they are not doing that, why would I let them use the Archer name?

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• Topics
• Australasia
• Buyout
• Buyouts
• IPO
• Trade sale
• Archer Capital
• buyout
• Australia
• Exit