Q&A: Archer Capital's Peter Wiggs

Q: Given the difficult fundraising environment, were you surprised it took less than four months to close Archer's most recent vehicle?

A: We went out with a target of A$1.25 billion ($1.35 billion) and a hard cap of A$1.5 billion and we were reasonably confident that we would raise capital within that range. There is a high degree of uncertainty regarding fundraising and so you don't really know what demand is going to be like until you're in the market. We had a series of exits in the second half of 2011 so were releasing good news as we were raising money. It would be disingenuous to say I wasn't surprised as to how quickly we ended up closing the fund, but performance has been good and we haven't changed our approach to doing deals one iota in the last 8-9 years. It was an easy fund to diligence from an investor point of view because you just had to make a call as to whether this was of interest to you. There was no second guessing about what a change in strategy might mean for the team.

Q: In what is a reflection of wider industry trends, offshore investors account for the majority of your fifth fund's corpus, the first time this has happened. What challenges does a reduced dependence on local LPs present for fund managers?

A: I said at last year's AVCJ forum in Australia, "If you don't have an offshore LP program, get one quick." That is the catch-22. It's impossible to rely on the local LPs so you need to go offshore, but the issue for the GP community is the minimum scale you need in order to be of interest to offshore investors. You have to raise at least A$500 million before you can even talk to these international guys. The logical consequence is it's going to be very difficult for people who have historically specialized in A$100-200 million funds. They are going to struggle and not necessarily because they aren't good managers. It's just that the structure of their investor base has changed.

Q: What sectors are of interest to you?

A: Our view is that different industries are at different stages of their cyclical and structural attractiveness for investment. We've done well out of retail in the past but it's unlikely we'll invest there in the foreseeable future because it faces massive headwinds and structural change. Mining services will continue to be a very strong focus for private equity in Australia. Geographically, we find ourselves more focused on the resource-rich states because they have fundamentally more attractive economics at the moment. There is no unemployment, high average wages and very strong demand across virtually anything in Western Australia, the Northern Territories and Queensland.

Q: Given the weak retail environment, when Archer invested Quick Service Restaurant Holdings it was described as a defensive play. Is this accurate?

A: Looking at data for the December quarter, retail generally was down and restaurants were down quite significantly. Fast food and takeaway food was up. People do trade down from restaurants to quick-service restaurants during the cycle. If you look at the last 20 years of data, downturns don't tend to impact the top line of these firms. We also liked that particular one because we felt there was a lot of growth to be had, particularly in the Oporto brand where we probably only have 25% of the outlets that brand should have.

Q: It was also a secondary buyout. Is this trend likely to continue?

A: Yes, because the inventory of private equity-owned businesses is quite large. If you look at the number of companies that are going to come to market, I would expect PE-owned businesses to account for a large chunk of them, although not all of these will go to other private equity players. If you go back 6-7 years, there wasn't a large inventory of private equity-owned businesses, but then we had that really big burst of buyouts in 2004-07, and those companies are now coming to market.

Q: There have also been more exits to Asian strategic investors...

A: Of the food and beverage businesses that have traded in the last 3-4 years in Australia, I'm struggling to think of one that hasn't gone to an Asian buyer. The most interest people selling those assets are getting is from Asian strategic buyers - and that's in the context of a fairly strong Australian dollar, so they aren't trying currency arbitrage. The Australian economy is on this 30-year fundamental integration into Asia and we are about 10 years into the 30 years.

Q: Can you see Australian private equity firms' geographical remits extending to reflect these changes?

A: From Archer's perspective, there is a value chain: you identify a business, buy it, improve it and sell it. In terms of pushing companies up into Asia, I suspect an Asian strategic investor would be better at that than me, so I should focus on identifying opportunities in Australia, execute on that value creation strategy, and position them for someone else to push up into Asia.

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