Q&A: Pacific Equity Partners' Simon Pillar

Q: What has deal flow been like over the past year?

A: The first half of 2014 was extremely robust but we saw less in terms of what we actually got done - there was a lot of bolt-on activity, but nothing from a primary perspective - and there are two reasons for that. One is we saw a more nuanced process on the part of vendors; the gestation periods on deals became longer than in previous cycles. The other issue is that the public markets have been very strong. Although a lot of the assets we look at are not relevant from a public markets perspective, it creates an expectation in the minds of vendors on pricing. The markets are holding up quite strongly but there is more nervousness out there in terms of how long it is going to last. In the first quarter of this year we are seeing positive signs in terms of the probability of transactions getting done.

Q: To what extent are shifts in Australia's macroeconomic position a concern?

A: We are focused on the 80% of the Australian economy that is driven by domestic consumption and the outlook there is pretty good. What the Reserve Bank of Australia is trying to do in terms of offsetting the reduction in mining capital expenditure through lower interest rates is all about stimulating consumption, so that's a positive. The drop in oil prices is significant in terms of the extra discretionary spending it creates. And then the reduction in interest rates is also bringing down the Australian dollar and encouraging more consumption to come back onshore.

Q: What does the downturn in the commodities cycle mean for your exposure to mining services?

A: Despite iron ore and coal prices coming off dramatically, the volumes being mined by the likes of Rio Tinto, BHP Billiton and Xtrata are actually going up. They are low-cost producers on a global basis and, as other miners around the world close capacity because they can't afford to operate at current prices, there is a share grab opportunity. If capital is not committed yet then it makes sense to hold off until the market comes back, but if capital is already in the ground - and you've got the fixed costs of a mine anyway - you may as well ramp up production. For mining services companies leveraged to the production cycle rather than the exploration cycle, it is not a bad place to be. Clearly there is pricing pressure because miners are trying to find ways to cut costs at every point, but volumes are going up.

Q: Thanks to the strong public markets, two PEP portfolio companies have done IPOs in the past 18 months. How dependent are you on this exit route and how do you manage its perceived volatility?

A: About 55% of our exits have been to strategics, 40% listings and 5% secondary sales. There has been a general view the market is either "open" or "shut" for listings, particularly PE-backed listings. What we have tried to do in this cycle is to give institutions a very positive experience so that even in a down-cycle - when the market is "shut" - if we have good product we can bring it to the institutions and have a sensible dialogue about whether we can list it. In the case of Spotless and Veda Group, because of the size of those assets, we necessarily needed to keep stakes in the businesses that are pretty material. That has signalled positively to the market.

Q: You have also sold assets to buyers from China, the Philippines and Europe. What does this say about the trade sale market?

A: The assets that we acquire tend to be market leaders in Australia and New Zealand that have seen lacklustre growth over the 2-3 years prior to our purchase. They require a big capex program or other substantial strategic or operational transformation to change the trajectory of the business. These types of situation are generally not interesting to overseas trade buyers. But if we can get hold of that asset, put in the capex, bring our strategic and operational toolkit to bear and set the company on a strong profit trajectory, several years on it is a very different proposition for an overseas trade buyer. There is definitely more interest out of Asia in Australasian assets and it presents an opportunity to shape assets in a way that makes them more relevant to these buyers. In the case of Griffin's Foods, we were developing a distribution joint venture into China and had some exports into the region, and URC was interested in how it could use its own base to broaden the business further.

Q: How are LPs' attitudes to co-investment evolving?

A: When we raised Fund IV in 2008 we were able to raise a supplementary vehicle alongside the main fund because, although there were LPs doing co-invest, it wasn't a large part of their programs. We have moved away from the blind pool supplementary fund product because LPs' capacity to do co-investment has changed dramatically over the last 5-6 years. However, there are different types of co-investor. You have large guys who are co-underwriters and want to be genuine partners in the business from day one with board representation. Another group that wants to be engaged in due diligence but are happy to leave running the governance process to the GP, and then a third group is very passive.

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• Topics
• Australasia
• Buyouts
• Exits
• Australia
• Pacific Equity Partners
• buyout
• Trade sale
• Exit
• Commodities