Australasian mid-market sees strong deal flow – AVCJ Forum

"These companies don't have a lot of resources to do things for themselves. They don't focus on areas such as working capital management and distribution strategies because they are led by sales people or because they have skills in other areas," Matt Riley, executive director at Waterman Capital, told the AVCJ Australia & New Zealand Forum. "It is easier to grow a business with $50 million in turnover than $500 million."

In many cases, these companies have never made acquisitions and so private equity investors can use their M&A expertise to support lateral deals. Riley pointed to the example of New Zealand-based transportation company Express Logistics. Waterman bought the business in 2005, completed 6-7 bolt-on acquisitions in Australia, and sold it to Toll Holdings four years later for $62.5 million. Toll had been one of the strategic investors that bid for Express Logistics in 2005. 

Pencarrow Private Equity, had a similar experience with nursery products manufacturer Phil & Teds Most Excellent Buggy Company, according to Executive Director Nigel Bingham. The PE firm invested in the business in 2006 and supported the acquisition of Mountain Buggy, a competitor that was in distress, before exiting back to management in 2010.

John White, founding partner at Next Capital, added that the slowdown in activity at the large end of the market has forced banks to pay more attention to the mid-market. "At this stage of the cycle we see bulge bracket investment banks making calls to Next Capital but three years ago they didn't want to know about us because they couldn't earn fees from our size deals," he said.

However, lower and mid-market players still learned lessons the hard way during the global financial crisis. Tim Sims, managing director at Pacific Equity Partners (PEP) - a mid-market player but towards the larger end of the scale - recalled book seller REDgroup Retail going into receivership in 2011 due to a combination of falling post-crisis demand and the rise of e-commerce.

"We moved too slowly when facing serious challenges," he said. "You look for the obviously solvable problems rather than the horrifying ones."

PEP's loss ratio was 1% on equity going into the crisis and 7% post-crisis, of which 6% was linked to the retail industry. Sims noted that the private equity is unlikely to invest in traditional retail again, but the experience also drove alterations in its approach to portfolio management. PEP now has internal teams that pay much closer attention to company boards and demand reviews whenever they come across uncertainties in the business model.

"The response time is critical," added Neville Buch, partner at Crescent Capital Partners. "On one occasion we were looking at a CEO who was saying, ‘You people are overreacting and forcing me to do things that will harm the business in the long term.' We don't want to overrule the CEO because we are supportive of management teams but when it's time to panic, it's time to panic."

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• Topics
• Australasia
• Investments
• Consumer
• Industrials
• Australia
• New Zealand
• buyout
• Next Capital
• Crescent Capital Partners
• AVCJ Events
• Pacific Equity Partners
• Pencarrow Private Equity