Australian GPs see strong investment climate, challenges for exits

With domestic corporates struggling to generate organic earnings that meet shareholders expectations yet unwilling to put their balance sheet at risk by making acquisitions, competition for assets is on the low side. "But exiting is not as easy as it once was," Kerwick noted." As a result, the ability to generate returns is highly dependent on value creation and strategic repositioning of businesses."

Kerwick made his observations during AVCJ's Australia webinar earlier today, appearing alongside Peter Wiggs, managing partner at Archer Capital, and Andrew Major, general manager for investments at superannuation fund HESTA. The session was moderated by Katherine Woodthorpe, CEO of the Australian Private Equity & Venture Capital Association (AVCAL).

The consensus was that Australia's private equity industry has been comparatively stable over the last couple of years and there is no reason to think this won't continue into 2013. Wiggs observed that the recent trend has been for $5-6 billion in annual deal value and $2.5-3 billion on committed equity. Domestic mid-market PE firms account for most of the activity, with an intermittent flow of large-cap deals from pan-regional funds.

In terms of transaction size and leverage multiples, the market is a far cry from the heady days of 2005-2007, but that is how LPs like it.

"The over-optimistic exuberance that led people to chase unrealistic returns based on unsustainably high leverage is not attractive to LPs anymore," Wiggs said. "In 2005-2006, track records with a few deals you hit out of the park and a few deals where you lost all your capital were pretty attractive. Now people want to see a much tighter range of outcomes."

Major concurred with this view, stressing the value of GPs that can point to consistent strategies and fund sizes, an alignment between managers and investors, a capability to execute investment strategies based on the capital being raised, and strong track records.

Discussing LP attitudes to the asset class, Major broke the Australian superannuation funds into three distinct groups: those that are committed to private equity because they see long-term value; those that have stopped investing; and those that have yet to decide on whether they will continue to invest or step back.

The positive takeaway for the private equity community is that these decisions are no longer being made purely in the context of fees. Pension fund reforms have made the superannuation industry far more focused on costs, prompting some to react negatively to the comparatively high fees charged by PE managers. However, Major said that net returns now also feature prominently in discussions about the asset class.

"We look to commit to GPs that can get returns in the high teens or low 20s," he added. "When you can't see these returns in all pockets of the sector you have to focus on certain pockets in terms of strategy and geography. It's not, ‘Should I invest or not?' but "What are the strategies and regions that will give me the best chance of achieving that rate of return?'"

These issues will also come under discussion at the AVCJ Australia & New Zealand Forum, now in its 10th year, which takes place in Sydney on March 6-8.

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