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MARCH 2014
Australian Private Equity Market Wrap 2013 and outlook for 2014
Welcome to this review of the Australian private equity market in 2013 and our views of the outlook for 2014. The Co-Heads of Private Equity at Allens, Tom Story and Mark Malinas, report. Some light ahead?
The year 2013 was a mixed year for Australian private equity deal activity. Rising equity markets stimulated a strong exit market in the second half of 2013, marked by a flurry of sponsor IPOs. However, continued availability of cheap financing and improving economic optimism meant sponsors faced strong competition for new acquisitions. On the fundraising front, the environment continued to be challenging as local managers were forced to scour offshore markets to find support for new funds.
Acquisition activity
In terms of new acquisitions, the year commenced with a significant transaction TPGs circa A$1 billion buyout of Inghams Enterprises. With the support of strong debt markets, it appeared that the Inghams deal would herald a resurgence of large leveraged buyouts in the Australian market. This did not prove to be the case. While larger buyouts were more common in the United States (eg Dell by Silver Lake and Heinz by Berkshire Hathaway and 3G Capital), further larger-scale transactions did not eventuate in this market. Although private equity sponsors participated in various auctions during the year, there was strong competition from trade buyers as confidence returned to corporate Australia post the Federal election in September 2013. Public to private transactions were also difficult to execute as rising equity markets pushed valuations beyond the reach of sponsors. Although opportunities abound in distressed segments of the market such as mining services, the cyclical nature of these businesses largely dissuaded sponsors from venturing into these areas.
Exit activity
The second half of 2013 has seen a flurry of sponsor-backed IPOs, highlighted by transactions such as Virtus Health (Quadrant), Dick Smith (Anchorage), Veda Group (PEP) and Nine Entertainment (Oaktree and Apollo). Anchorages turnaround of the Dick Smith Electronics chain following its acquisition in 2012 is universally regarded as one of the private equity deals of the year. Bought for an initial cash outlay of A$20 million and subsequent deferred consideration on exit, the IPO raised in excess of A$300 million. Anchorage also retained a 20 per cent interest in the company. Overall, an outstanding result for Anchorage. One of the trends evident in the current batch of sponsorbacked IPOs is increasing fund manager pressure for sponsors to retain a significant stake to ensure alignment of interest with new investors. For example, PEP elected to retain a majority shareholding as part of the Veda Group IPO a decision vindicated by the very strong post-listing trading performance of the Veda Group. Equally, however, extremely strong investor demand for Virtus Health saw Quadrant exit its entire stake. So the question of whether sponsors should be retaining a post-listing stake remains a deal-specific issue for sponsor IPOs in the Australian market. The early indications in 2014 are that investor demand for new IPO product may have waned slightly, compared to the growing pipeline of new offers. However, after several years of subdued activity, we expect to see a continued strong market for quality sponsor assets from fund managers looking for new growth opportunities in equity portfolios. The opening of the IPO window following the Virtus Health transaction also spurred on trade buyer activity, resulting in a number of strong private equity exits to trade buyers (both domestic and offshore). Interest is certainty sector-specific and not across the entire market. Mining, construction and related service businesses remain difficult. Both Coates and Bis Industries pursued refinancing transactions as an alternative to exits. However, interest remains strong across a variety of other sectors, prompting the return of genuine dual-track processes to the Australian M&A market.
Fundraising
Fundraising remains challenging for local private equity sponsors, as many Australian superannuation funds continue to wind back allocations to alternative asset classes. Anacacia Capital (A$150 million), Anchorage (A$250 million) and Advent Private Capital (A$200 million) were among the local sponsors to successfully tap the market in 2013. The sums raised by sponsors in Australia was, in aggregate, lower than in prior years, and sponsors are increasingly needing to look offshore for funding. We expect this trend to continue, with many sponsors now obtaining 50 per cent or more of their funding from offshore. With that said, some outstanding exit results were realised in 2013, which should serve well those sponsors rattling the can in 2014 and 2015. New fund activity is also seeing discussions with LPs on more customised fee arrangements, as investors press for alternatives to more established fee models. Achieving true alignment of interest will continue to be a fundamental feature of GP/LP discussions as new funds are pursued.
Allens private equity deals in 2013 and early 2014 (to Feb)
Private Equity Sponsors
Investment
Actrol Bluestone Group Australian Satellite Communications and Pactel Jarvie Engineering Securency International
Our role
Advised Catalyst Investment Managers on its A$280 million sale of Actrol Parts and A.C Components to Reece Australia Limited. Allens acted on the original acquisition of both businesses. Advised mid-market private equity company LDCs acquisition of Crescent Capital and the Liberman familys stakes in non-conforming lender and asset management company Bluestone Group. Advised TA Associates on its Hong Kong-based global network and satellite communications service provider investee SpeedCast Ltd.s acquisition of Australian providers Australian Satellite Communications and Pactel. Advised AEA Investors LP portfolio company Swanson Industries acquisition of the Jarvie Engineering hydraulic cylinder engineering business. Advised Arle Capital Partners and its portfolio company, Innovia Film, on their A$65 million buy-out of the remainder of shares in Securency International from the Reserve Bank of Australia.
Our role
Advised Billabong International on the companys recapitalisation by Oaktree and Centerbridge. We previously advised on the responses to a series of prior proposals by Sycamore Partners and Altamont Capital Partners and an original offer by TPG. Advised Lend Lease on the A$270 million sale of its Australian aged care business to Australian private equity firm Archer Capital. Advised Nintex Group Pty Ltd on its US$222 million takeover by TA Associates and Updata Partners. Advised Nitro Circus on the sale of a A$25 million stake in Nitro Circus Live to The Raine Group.
Financings Investment
Inghams Zip Industries Link SCA Hygiene Spotless Group Peters Ice Cream Genesis Care
Our role
Advised the lenders to TPGs acquisition of Inghams. Advised the lenders to Quadrant Private Equitys acquisition of a majority stake in Zip Industries. Advised Macquarie Group Ltd on its acquisition, together with Intermediate Capital Group PLC, of a 25 per cent stake of Pacific Equity Partners share registry operator Link Administration Holdings Pty Ltd. Advised the lenders on Pacific Equity Partners dividend recapitalisation of its investment in SCA Hygiene Australasia. Acted as Australian counsel to the lead arrangers to Pacific Equity Partners dividend recapitalisation of its investment in the Spotless Group facilities services company via a Term Loan B financing. Advised Pacific Equity Partners on its dividend recapitalisation of its investment in Peters Ice Cream. Advised the lenders to KKR on its dividend recapitalisation of its investment in the Genesis Care medical business.
Contacts
Allens 17882