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Australian GPs look to retain spirit of entrepreneurship - AVCJ Forum

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  • Tim Burroughs
  • 13 March 2023
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The combination of personalities and skillsets that characterised the first generation of Australian private equity is unlikely to be repeated, but GPs are still looking for ways to capture elements of entrepreneurialism even as the industry becomes more institutionalised.

“When you come into a firm as an employee where the firm has 20 years of history and is onto its seventh fund, that speaks to a very different person to someone who comes in at Fund I or II, maybe not from an investment bank but from a left of centre background,” said Peter Wiggs, founding partner of Archer Capital, told the AVCJ Australia & New Zealand Forum.

“You can’t take someone who is inherently risk-averse, inherently comfortable with hierarchy and institutional structures and turn them into an entrepreneur.”

Wiggs, who stepped back from Archer five years ago and now invests through a family office structure, was speaking on a panel marking the 20th anniversary of the forum. The apparent tensions between size and nimbleness and institutionalisation and entrepreneurship were touched on multiple times as the panellists discussed the next stages of the industry’s evolution.

The contemporary relevance of the debate was captured by changes in the investment landscape – and the expectation that the accommodating macro environment of the past decade will not persist – and a split in the investor base, largely but now wholly in terms of assets under management.

Steve Byrom, who led the private equity team at Australia’s Future Fund and now runs institutional advisory firm Potentum Partners, noted that the period in which “it has been exceptionally easy to make money out of this asset class” is ending and there is now more emphasis on manager skill. At the same time, the same boom period has seen a shift in investor appetite.

“As managers grow and institutionalise, it impacts the level of risk they want to take and the kind of people they want to employ,” said Byrom, adding that the beta returns often associated with this approach are available by investing in listed private equity stocks for little or no fees.

“The alpha comes from entrepreneurial run and led organisations that have developed deep skillsets, where they can rinse and repeat, company after company and deal after deal. A small minority of the 8,000 GPs globally are in that camp. The more institutionalised you make an organisation, the less entrepreneurial flare you attract to it.”

Michael Lukin, who formed Roc Partners in 2014 on leading a spinout of Macquarie Group’s private markets business unit, highlighted the emergence of a subset of large-scale players getting more from a 12% return on a USD 1bn commitment than a 20% return on a USD 20m outlay. Small to mid-size managers in Australia are more likely to find favour with the country’s rising private wealth segment.

“Entrepreneurial flare appeals to these people because a lot of them built their own businesses and sold them, and they understand and appreciate what it takes to be successful,” he said. “There will be the big global guys who get funded with big cheques, but there will be more interest from family offices and private wealth platforms in emerging groups in Australia.”

Even among the middle-market firms that pioneered private equity in Australia, recruitment policies changed as they grew larger. Wiggs noted that six original partners at Archer included one investment banker; the others came from consulting or other industries. From Pacific Equity Partners (PEP) to Quadrant Private Equity and beyond, ex-consultants and commercial bankers predominated.

Of the last 20 people Archer hired, 19 came from investment banks. The priority when recruiting became who could hit the ground running – and typically those people were investment bankers who understood financial modelling.

“Consultants you’ve got to somehow teach what financials are. Guys from corporations you’ve got to teach what a transaction is. Entrepreneurs you’ve got to teach everything to,” said Wiggs.

“Everyone says, ‘I don’t have time for that because we aren’t KKR, we aren’t McKinsey, we don’t have the infrastructure to develop our own people that quickly. We can’t just siphon off a quarter of our day to hold these people’s hands, so a guy from Goldman looks just fine to me. Next.’”

Simon Pillar, one of PEP’s four founders, three of whom came from management consultant backgrounds, added that private equity firms build up around the personalities and characters that create them. While the kind of entrepreneur who carves out a new industry is unique – such as the private equity pioneers in the US – it is still possible to bring innovators into the industry.

“Would the mavericks who set up those firms in the early days be comfortable in the more established firms that exist today? Probably not. Are people looking to break new ground interested in joining firms today? Absolutely. We are seeing them, we want to hire them,” he said.

Roc’s Lukin added that in an increasingly competitive investment landscape, managers are under pressure to find more ways to generate value – whether it is through proprietary deal flow, operational capabilities, or sourcing financing on attractive terms. This pushes them to think more carefully in terms of recruitment.

“One size doesn’t fit all anymore. You need people from different backgrounds, different experiences, doing different things in an organisation to get the most out of a business and out of a fund,” he said. “What that naturally leads to is more specialisation. Australia is still a world of generalist private equity firms, but within those firms you see pockets of specialisation.”

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