Australia buyouts: Downsizing

Bain is not alone in dipping into deals that are smaller than those readily associated with global and regional buyout firms. A number of domestic firms are doing it too: last year Archer Capital bought outsourced flight support services provider from Next Capital for an enterprise valuation of less than $200 million.

Scan a list of Australia private equity investments from the last few years and one not only finds big name firms in surprisingly small transactions, but also an explanation as to why they are doing it.

In 2006 and 2007 there were seven deals worth $1 billion or more. Since then, with the exception of 2010, there have been no more than two in any one year. Six of the 10-strong billion-dollar crowd, including the top three, involved ports, roads and utilities. These assets are the preserve of specialist infrastructure investors and institutions in search of long-term, stable returns. The $500 million to $1 billion space, though more active in the last few years than at any time before, is patchy and there remain large helpings of infrastructure assets.

By contrast, between $100 million and $300 million there is much more consistency. Deal flow is not about to recapture its pre-global financial crisis peaks - and nor should it, given a fair share of transactions from that period performed poorly - but at least 10 investments have been completed in each of the last five years.

The fact that larger GPs are pushing down into areas that are below their normal check size underlines the impact of Australia's robust public markets. Companies of a certain size have found that they can raise capital through an IPO at a higher valuation than they would get from a private equity firm. Another group is already listed and may no longer be under pressure to consider privatization offers, while a third isn't a genuine public markets candidate but the owner's valuation expectations have been influenced by the wider frenzy.

By contrast, smaller players are some distance away from even considering an IPO. Governance structures must be put in place, consolidation plans executed to create sufficient scale, older or unsuitable executives transitioned out and replaced by highly professional teams. Once these goals have been achieved and profitability proved does an exit loom into sight.

The public markets cannot retain their momentum forever - indeed, there are already signs that confidence is wearing thin - and the big private equity firms will duly re-focus on deals more commensurate to their fund sizes. Until then, though, they have the unusual pleasure of rubbing shoulders with their smaller local brethren.

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• Topics
• Australasia
• Buyouts
• Exits
• Australia
• buyout
• IPO
• Exit