Specialization: Buying better

Barely six weeks into 2018 and two US mid-market private equity firms have snapped up assets in Australia. First, Battery Ventures took a stake in PageUp, a developer of cloud-based enterprise talent management software. Then Thoma Bravo agreed to buy control of Nintex, a workflow management software provider. 

These are not necessarily surprising targets. Both companies were founded in Australia but have expanded their businesses globally. Furthermore, each transaction represented a liquidity event for an existing investor. In short, these companies were on the radar of their new tech-focused US owners.

The broader question is why Australian private equity firms didn’t target these deals. There certainly appears to be a gap in the market for investors seeking growth and mid-market buyout opportunities in emerging industries and a couple of local GPs are trying to raise sector funds in order to fill it. In a market that has typically embraced generalist strategies, is specialization – of any kind – the key for a next-generation private equity firm that wants to buy and build the best companies?

Private equity activity in Australia’s middle market as share of overall M&A remains relatively small by international standards. Data from Mergermarket and AVCJ Research suggest that in the core sub-$250 million enterprise value segment has actually fallen in recent years as overall deal flow has grown. In 2017, private equity investors accounted for approximately 10% of disclosed transactions, the same as the previous year. In 2010 and 2011, their share was 25% and 20%, respectively.

There are two immediate explanations for this. First, some managers have graduated to larger transaction sizes, although the PE share of activity in the $501 million to $2 billion segment jumps around rather than reflecting consistent growth and includes deals by international GPs. Second, the Australian GP community is shrinking, largely as a result of dwindling appetite for the asset class among certain LPs.

The second point is broadly true, but it is interesting to consider what trends the headline data do not capture. While new GPs that have managed to raise funds are to a certain extent seen as replacements of existing players, there is also an expanding clutch of managers that don’t fit the normal fundraising profile. These could be IFM Investors or one of a few deal-by-deal players trying to reach into the space occupied by institutional funds.

Should the influx of smaller foreign competitors continue as well – there are no guarantees that it will – the onus increasingly will be on local private equity firms to emphasize how they are different. For example, several LPs observe that members of the local GP community, with a few honorable exceptions, trail their developed market peers in terms of utilizing operating partners. Addressing this issue, while not a sector specialist panacea, does reflect an awareness that strategies must evolve.

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• Topics
• Australasia
• GPs
• Buyouts
• Australia