A story that sells

Yes, GPs attracted commitments of just $800 million, half the previous year's total. And yes, it was the lowest level since 2009. But, the article added, the market lacks depth. Only 19 funds - and 11 managers - have ever crossed the $400 million mark. There are probably only four managers currently active that could draw in excess of $750 million for a corporate PE vehicle.

Within days, Quadrant Private Equity proved the point, closing it seventh fund - and fourth raised as a fully independent entity - at A$850 million ($758 million) after just over one month in the market. It is indeed a market that lacks depth, and so when a fundraise goes fast it goes very, very fast.

The last time one of the Big Four came to market, Archer Capital in 2011, it accumulated A$1.2 billion within four months. The similarities don't end there.

Archer was one of Australian private equity's biggest spenders in 2011, making four investments with a cumulative enterprise value of more than A$1 billion across four transactions. It also made divestments worth more than A$2.5 billion over the period, securing an average return of 3.2x and an IRR of over 40% from four exits. These included accounting software firm MYOB, which was sold to Bain Capital for A$1.3 billion, nearly three times the sum committed in early 2009.

The previous year Archer made five investments, but the disclosed enterprise value was around $150 million. There were no exits. A single exit in 2009 generated proceeds of just under $100 million.

In 2013, Quadrant completed four investments with an enterprise value in excess of $400 million, according to AVCJ Research. This was less than the previous year but it should be seen in the context of broader market conditions: 2013 was an unusually quiet year for Australia's mid-market GPs, arguably due to strong public market pushing up valuation expectations.

Quadrant also made two full exits during the course of the year and a partial exit in the opening few weeks of 2014, up from zero in 2012. The first two were both via the public markets: the GP sold its entire stake in fertility services provider Virtus Health through the IPO for an estimated return of 2.5x; and then the last of several sell-downs of New Zealand retirement home operator Summerset, which went public in 2011, took place in October, generating an estimated return multiple for the full investment of more than 3.7x.

These circumstances aren't altogether unusual. A GP approaching the end of its investment period - or at least closing in on the 70% deployment hurdle that typically allows new fundraising activity once crossed - is incentivized to invest any remaining dry powder. Similarly, as a fund enters years four and five, certain assets might ripe for sale, with investment bankers hankering after an IPO or strategic buyers making reverse inquiries about potential acquisitions.

Just to pick two of the largest funds that reached a final close in 2013, KKR likely benefited from the substantial exits of Unisteel and Intelligence Holdings from its first pan-regional fund as the successor vehicle closed in on the bumper $6 billion target; and MBK Partners completed three of the largest buyouts seen in the region in between launching its third North Asia-focused fund in August 2012 and closing it in September at $2.7 billion.

However, Archer and now Quadrant are stark examples of how investment and exit activity can be wound into a fundraising to great effect. Yes, the process is largely deliberate and managed. But it is the story that LPs want to hear: proof of thesis and execution ability.

 

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• Topics
• Buyout
• Fundraising
• Australasia
• Australia
• Quadrant Private Equity
• buyout
• Fundraising