Soft middle: Australia's underserved lower middle market

Anacacia Capital closed its debut lower middle market buyout fund at A$50 million ($38 million) in 2008. Eleven Australia and New Zealand-focused GPs achieved final closes on growth and buyout vehicles of $25 million or more that year, with nine of those falling within the $25-249 million range.

In 2013, Anacacia closed Fund II at the hard cap of A$150 million. It was one of four that year, all of them sub-$250 million, according to AVCJ Research. Since 2011, there have been nine final closes in that segment of the market, down from 34 in 2005-2010. The same trend is apparent in the $250-499 million space: nine final closes in 2005-2010, four in 2011-2016.

While the number of PE firms in the market has shrunk across all segments in recent years, the hollowing out of the lower middle market is arguably the most striking development. First, it’s where most of the action is (Australia has over one million small businesses). Second, it is where a number of GPs built their reputations before moving to larger fund sizes.

Australia and New Zealand’s economies have certainly evolved during this period and the private equity opportunity has also become more varied, to some extent justifying these size increases. Local LPs are partly to blame as well, with superannuation funds finding it ever harder to back smaller managers because of the growth in their own asset bases. This puts many younger GPs in a difficult position as international investors can be reluctant to commit if their domestic peers are not.

In this context, the emergence of new private equity firms in a market that hasn’t seen many of them in recent years is encouraging. One placement agent says he counted 13 new managers in the market as of the end of last year. They make for an intriguing mixture, from unproven teams working deal-by-deal with family office money in order to build up a track record ahead of a fundraise to spin-outs from established players in the market that attract institutional LPs from the outset.

Odyssey Private Equity, formed by executives from CHAMP Ventures and Quadrant Private Equity, falls into the latter category – and with A$275 million to deploy, it is very much a creature of the lower middle market.

However, other new GPs expected to raise institutional capital do not fit so easily into this category, or perhaps any category at all. For example, Adamantem Capital has a broad remit that runs from growth capital for private businesses to partnership solutions for listed companies, while Potentia Capital has been positioned as Australia’s first specialist technology buyout shop.

These GPs all fall under the middle market umbrella, but the differentiated strategies could be seen to reflect the maturing of the Australia and New Zealand private equity market just as much as the fact that they are spin-outs.

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• Topics
• Australasia
• Buyouts
• GPs
• Australia
• Anacacia Capital
• Odyssey Private Capital
• Adamantem Capital
• Potentia Capital