Fund focus: Remote diligence underpins Adamantem’s first close

The most striking statistic from Adamantem Capital’s first close on its second fund is that half the money comes from new investors. The Australia-based mid-market private equity firm wanted to diversify its LP base, having relied heavily on a handful of large checks in Fund I, and despite the limitations imposed by COVID-19, this goal appears to have been achieved.

Fund II launched in February, a matter of weeks before the pandemic hit Australia, targeting A$700 million ($514 million). With A$675 million in commitments – and total capacity of A$725 million, including A$25 million from the GP and from friends and family – Adamantem has now ended the active fundraising process. A final close is expected within a couple of months as LPs that wanted to delay decisions until the second half of the year sign off on their investments.

“The logistics were considerably more complex than expected – people who had anticipated doing on-site due diligence were not able to do it. Fortunately, most of them had already met us, so they were able to do it remotely,” said Anthony Kerwick (pictured), a managing director at the firm. “In some ways, that worked to everyone’s benefit. We could work to times convenient in their home markets, so the sessions were spread out. We were also more flexible in terms of deadlines, moving to a rolling series of investor commitments because it was harder to corral people into a single timeline.”

Fund I closed at A$608 million in early 2018, two years after Kerwick and co-founder Rob Koczkar, both former executives at Pacific Equity Partners, established the business. There were 11 institutional investors on the LP roster, and Australian groups accounted for 60% of the corpus.

For the Fund II first close, the domestic-foreign split is 50-50 and the 30 participating investors include 16 institutional names, eight existing and eight new. The core Australian superannuation supporters from Fund I remain, but they have been joined by a wider spread of US and European investors, including pension funds, fund-of-funds, insurance firms and family offices. Most of these groups have dedicated teams in Asia, albeit not in Australia.

While some of the new money is Australian – and those LPs were able to conduct on-the-ground due diligence – overseas players did not have this luxury. Kerwick describes the team’s LP outreach efforts in 2018 and 2019, which prompted some investors to visit Australia for meetings last year, as “a victory for good planning and a bit of good luck.” The fact that some face-to-face engagement had already taken place made it easier for groups to rely on video conferencing and digital resources for the rest of their due diligence.

At the same time, Adamantem noticed an evolution in how LPs were prepared to do business. When it became apparent that the pandemic would be protracted, and likely rule out international travel for most if not all of 2020, investors faced a choice: adapt or don’t deploy. Gradually, due diligence requirements that were previously non-negotiable became flexible.

“We were pleasantly surprised by how much effort investors put into finding a way to gain sufficient comfort for their internal processes and doing things they hadn’t done before. Sometimes that involved hiring advisors in Australia to do work that would normally be done in-house,” said Kerwick. He added that working remotely might have led to greater precision in due diligence because there was more written and recorded communication that could be reviewed and followed up on.

The strategy for Fund II is unchanged. Adamantem will target companies across Australia and New Zealand with enterprise valuations of A$100-500 million, focusing on consumer staples, B2B services, healthcare services. None of the Fund I portfolio companies – which range from aged care provider Heritage Lifecare to horse feed manufacturer Hygain Holdings to data analytics business Servian – have been significantly impacted by COVID-19.

“We choose relatively defensive businesses where we can back a management plan to take some calculated risk that’s really going to drive improved operational and financial performance,” said Kerwick. “We believe our three sectors are the right places to deploy capital in a world where there is more volatility and uncertainty in the next three years than there has been in the last three years.”

The current market conditions are already prompting corporates to consider divestments. Adamantem is having more conversations regarding full sales as well as transactions structured in a way that gives the parent a continuing equity interest or the option to buy back the business. The pandemic has also made owners of private companies reassess their priorities, potentially accelerating the timeline for slow-burn succession planning deals.

“We have seen an uptick in the last couple of months of conversations with private companies we’ve been talking to over the last few years in a low-key way,” said Kerwick. “The pandemic has forced a few to think about how much longer they want to have all of their wealth in one asset and how much longer they want to be spending most of their time running a business instead of doing something else with their lives.”

The first investments from Fund II are expected to come before the end of 2020. While Adamantem is ready to commit capital in the right circumstances, there is an element of caution to the firm’s approach. It is not just uncertainty regarding business prospects due to COVID-19. Understanding the impact of structural changes in consumer behavior is also a priority – essentially disentangling temporary reactions to a downturn from permanent reactions to underlying trends.

Meanwhile, Australia has entered its first recession in 30 years, with a 0.3% contraction in GDP in the first quarter followed by a 7% retraction in the second. Kerwick reflects that the next 12-24 months will present a series of challenges the like of which most investors haven’t confronted before.

“What the rules of the game will be like going forward and how markets and different sectors respond to that are going to be a bit of a learning experience for everyone. It would be dangerous to predict how it is going to unfold,” he said. “In that environment, it pays to be cautious, but it also pays to be flexible and not go into it with too many preconceptions.”

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• Topics
• Australasia
• Buyout
• Fundraising
• GPs
• Australia
• Adamantem Capital
• covid-19
• coronavirus