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Asia’s Private Equity News Source avcj.com February 25 2014 Volume 27 Number 07

FOCUSFOCUS

Broken confidencesAre PE players losing sleep over Australia’s super fund disclosure rules? Page 7

The collective spiritCrowdfunding gains traction down under 4

Diversity in distressGPs adjust to evolving special situations Page 12

Australia’s mid-market GPs wait patiently for a buyout rebound

Page 16

Bumper PE deal flow in 2013 flatters to deceive

Page 3

Baring Asia, CalPERS, CDH, EQT, Fosun, GGV, Hopu, IDFC, IFC, INCJ, Kendall Court, Morningside, NSSF, Origo, Samena, Temasek

Page 4

EDITOR’S VIEWPOINT

ANALYSIS

PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM AUSTRALIA 2014

HESTA’s Andrew Major and QIC’s Marcus Simpson

Page 11

Sebastiaan van den Berg of HarbourVest Partners

Page 19

INDUSTRY Q&A

NEWS

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Number 07 | Volume 27 | February 25 2014 | avcj.com 3

EDITOR’S [email protected]

FROM 2006 OR THEREABOUTS, AUSTRALIA suddenly became the destination in Asia for GPs focused on leveraged buyout deals. In the space of 12 months, private equity investment in the country jumped from $2.5 billion to more than $16 billion.

Over the next few years, global and regional firms competed against – and collaborated with – top local managers to acquiring plumb Australian assets. The list of targets included the great and the good of domestic consumer brands, including the likes of Cole Myers and Borders. There was even an audacious, though ultimately unsuccessful, bid for national carrier Qantas.

The global financial crisis inevitably dampened that mood and sharply reduced banks’ willingness to support large transactions. However, AVCJ Research’s records indicate that Australia remains an active private equity market. More than $15 billion was deployed in each of 2006, 2007 and 2010. Last year a total of $12 billion was invested, not touching the pre-financial crisis peaks but not a long way off.

Yet for some reason 2013 didn’t really feel like one of those boom years. The reason for this is plain to see when you study the transactions – 2013 was a big year thanks to two large-scale infrastructure deals, the ports of Botany and Kembla, and then the Port of Brisbane.

These assets, acquired by large global institutional investors – in one case in partnership with a local manager – accounted for more than half of the total annual deal flow. Small transactions continued to flow but the upper mid-market firms were, for various reasons, quieter than usual and large-scale corporate private equity buyouts remain patchy.

PE managers and advisors link the slower investment environment to the robust capital markets. In the first half of 2013 a number of GPs busied themselves by making the most of the opportunity to refinance debt packages on more attractive terms. They have also taken advantage of a revival in the IPO markets, which gathered

pace during the second half of 2013. A total of nine PE-backed offerings raised record proceeds of $2.5 billion, and more offerings are expected in the first few months of 2014.

Exits and returns are a good thing but the same bull market hasalso contrived to push up valuations or at least expectation of business owners, making value investment more difficult.

The fundraising environment is hardly a ringing endorsement, with Australia-focused managers attracting commitments of around $800 million in 2013, half the previous year’s total. It does suggest less dry powder coming into the market but then it is not a particularly deep market. None of the mid-market GPs closed funds in 2013; two might in 2014.

Nevertheless, it seems the stars are not yet aligned for Australia to recapture its former glories – and some might argue this is a good thing, citing the arguably reckless ambition of 2006-2007. However, as the markets saturate and business owners come back to reality, the opportunity to buy will once again present itself. Private equity investors are lying in wait.

Allen LeePublishing DirectorAsian Venture Capital Journal

That was then, this is now

Managing Editor Tim Burroughs (852) 3411 4909

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avcj.com | February 25 2014 | Volume 27 | Number 074

GLOBAL

CalPERS lowers investment risk, trims PE allocationCalifornia Public Employees’ Retirement System (CalPERS), the largest public pension fund in the US with more than $277 billion in assets, will reduce its target allocation for private equity from 14% to 12%. The move is part of a broader effort to lower investment risk.

ASIA PACIFIC

IFC puts $25m to Olympus’ Asia environment fundInternational Finance Corporation (IFC), the investment arm of the World Bank, plans to invest $25 million in Olympus Capital Asia’s latest pan-regional environment fund. The vehicle has a target size of $300 million.

AUSTRALIA

EQT buys I-Med from hedge fund ownersAustralian radiology provider I-Med Network Radiology is being sold by its hedge fund owners to a consortium led by EQT Partners. I-Med’s current backers - a 25-strong group of investors led by US hedge funds Anchorage Capital and Fortis Investment - were approached by EQT following the company’s A$240 million ($216 million) debt refinancing in November.

Artesian launches crowdfunding platformEarly-stage venture capital firm Artesian Venture Partners has launched its equity-based crowdfunding platform – VentureCrowd – in Australia with over 200 registered investors and 36 start-ups. VentureCrowd differentiates itself from other crowfunding platforms such as Kickstarter and Indiegogo by offering business ownership.

GREATER CHINA

Chinese insurers approved to commit more to PEThe China Insurance Regulatory Commission (CIRC) has raised the cap on insurers’ exposure to

publicly traded companies and private equity to 30% of total assets.

Origo restructures China cleantech fundOrigo Partners has restructured its China cleantech fund - China Cleantech Partners (CCP) - taking full control of the vehicle and paving an exit for co-investor Ecofin Water & Power Opportunities (EWPO). UK investment trust EWPO and Origo each committed $15 million to CCP when it was launched in 2011. The vehicle was

managed on a 50-50 basis by Origo and EMFI, an affiliate of EWPO

NSSF joins cornerstones for Poly Culture IPOChina’s National Council for Social Security Fund (NSSF) will commit about $19.8 million as a cornerstone investor in Poly Culture’s HK$2.57 billion ($331 million) Hong Kong IPO. Poly Culture, an auction business unit controlled by state-owned Poly Group, plans to sell 77.78 million shares at HK$28.20-33 apiece.

CDH pays $40m for 20% stake in China gold projectCDH Investments will acquire a 20% stake in Eastern Dragon project, a gold reserve base owned by Canadian miner Eldorado Gold Corporation, for $40 million in cash.CDH will own a 21.05% interest in Sino Gold Tenya, Eldorado’s Hong Kong subsidiary, which indirectly holds the company’s 95% interest in Eastern Dragon,

CSRC to restructure, introduce PE departmentThe China Securities Regulatory Commission (CSRC) is undergoing a restructuring that will see the creation of four divisions to oversee fast-moving markets, including private equity.The new divisions will cover bond trading, private equity, innovative businesses, and illegal fundraising.

Morningside raises $412m across three China fundsMorningside Technologies, an investment company set up by Hong Kong’s Chan family - owners of property developer Hang Lung Group - has raised $412 million across three China technology-focused funds.

GGV targets $500m for new Sino-US fundGGV Capital, the US- and China-focused venture capital investor, is seeking $500 million for its fifth fund. A close on its new fund is expected in the first half of this year. It is expected to invest in companies based in China and the US.

Fosun Venture leads Series B round for KmsocialFosun Venture Capital Investment has led a Series B round of funding for Kongming, a Beijing-based social media marketing solutions provider, with

Investors trade GMR Energy shares for infra exposureA consortium of investors led by IDFC Alternatives and Temasek Holdings have agreed to restructure their investments in India’s GMR Energy (GMRE) by purchasing INR11.4 billion ($183 million) in convertible preference shares in GMR Infrastructure (GMRI).

GMRI is a flagship company of industrial conglomerate GMR Group and parent of GMRE.

It will issue INR7.9 billion and INR3.5 billion in shares to the Singapore sovereign wealth

fund and the IDFC consortium, respectively, via a preferential allotment, as per a regulatory disclosure. Both parties had previously invested INR13.9 billion in convertible preference shares in GMRE in 2010. While the bulk of these holdings will be swapped for shares in GMRI, the investors will retain a residual invesmtent worth INR2.58 billion in GMRE. The transaction means the company can avoid buying back the compulsory convertible preference shares.

In September, the investors dropped the option of exercising the put option and started negotiations with GMR. Management agreed to offer preference shares in GMRI because the company was not in a position to buy back the shares, given its debt burden of INR410 billion and 3.7x gearing.The deals also comes as GMR is looking to spin-out the energy business via an IPO.

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participation from previous investor Fidelity Growth Partners Asia. The investment size is about $10 million.

Hopu participates in $2.5b warehouse investmentHopu Investment Management is part of a consortium that has agreed to invest $2.5 billion in Global Logistic Properties (GLP), a Singapore-listed warehouse operator with interests in China, Japan and Brazil.

Horizon leads $23m round for Hampton Creek FoodHorizon Ventures has led a $23 million Series B financing round for Hampton Creek, a US-based food technology firm. Yahoo co-founder Jerry Yang, AME Cloud Ventures, entrepreneurs Ali and Hadi Partovi, Scott Banister, Morado Venture Partners’ Ash Patel, and Google Vice President Jessica Powell also participated, as did existing investors including Khosla Ventures and Collaborative Fund.

NORTH ASIA

INCJ invests $9m in animation tool developerThe Innovation Network Corporation of Japan (INCJ) has invested JPY900 million ($8.7 million) in New, a start-up that develops tools for creating motion comics. Set up by Nobuyuki Muto in 2012, New develops online animation tools used for the commercial production of motion comics - a form of comic that combines printed comic books and animation.

Goldman, Mitsui invest in Global Beverages & FoodsGoldman Sachs, Mitsui Global Investment (MGI) and a number of other unnamed investors are paying INR3.15billion ($50.4 million) for a undisclosed stake in Global Beverages and Foods (GBF). The business was founded by A. Mahendran, former managing director at Godrej Consumer Products.

Japapp Smart Education raises $5.4mCyberAgent Ventures and Infinity Venture Partners have invested JPY550 million ($5.4 million) in Smart Education, a Tokyo-based developer of educational mobile apps for kids. Founded in 2011, the start-up focuses purely

on developing apps and teaching materials for children. To date is has developed seven apps.

SOUTH ASIA

Samena picks up stake in Mahindra scooters businessAsia and Middle East-focused private equity firm Samena Capital has bought a 20% stake

in Mahindra Two Wheelers, a scooter business controlled by Indian conglomerate Mahindra Group, from Kinetic Engineering.

IFC commits $50m to Cholamandalam NBFCInternational Finance Corporation (IFC), the investment arm of World Bank, is investing INR3.15 billion ($50.7 million) in non-banking finance company (NBFC) Cholamandalam Investment & Finance . IFC will subscribe to tier two debt in the form of unsecured non-convertible debentures (NCDs) issued by the Bombay Stock Exchange-listed company.

Bamboo, Saama invest in Modern Family DoctorBamboo Finance, a European private equity firm that focuses on investments benefiting low-income communities in emerging markets, and early stage investor Saama Capital have together taken part in a Series B round of funding for Indian healthcare provider Modern Family Doctor.

IFC pumps $91m into Indian NBFCsnternational finance Corporation (IFC), the investment arm of the World Bank, has committed around $91 million in three PE-backed non-banking financial companies (NBFCs) in India: Magma Fincorp, Bandhan Financial Services and Au Financiers.

ACT gets OCA Credit, Kilimanjaro debt solutionAtria Convergence Technologies (ACT), an Indian broadband and cable TV access provider backed by India Value Fund Advisors (IVFA), has received structured debt financing from Olympus Capital Asia Credit (OCA Credit) and Kilimanjaro Credit Fund.

SOUTHEAST ASIA

Baring exits Indonesian aviation services providerBaring Private Equity Asia has sold its 41.65% stake in air freight and passenger services provider Cardig Aero Services (CAS) to Singapore Airport Terminal Services (SATS) for IDR1.1 billion ($93.5 million). The PE firm invested approximately $41 million in CAS in December 2011.

Kendall ends Intrepid’s Indonesia mine nightmareKendall Court has acquired Intrepid Mines’ interest in the Tujuh Bukit copper-gold project in Indonesia for $80 million, ending the Australia-listed resources company’s long-running ownership dispute over the asset.

Kendall Court Resource Investments has acquired a convertible bond and option into Merdeka Serasi Jaya (MSJ) - the holding company for the Tujuh Bukit project - that would give it a 22.5% stake in the business if fully converted. MSJ is looking to raise up to $75 million through an IPO in Jakarta in the third quarter of 2014. Intrepid said it was awarded the securities after Provident Capital and Saratoga Capital brokered an agreement between all parties involved in the dispute. A deed of settlement has been signed that will bring to an end to arbitration proceedings in Singapore and a court case in Indonesia.

The settlement involves Indo Multi Niaga (IMN), one of Intrepid’s former Indonesian partners, issuing a bond convertible into a 15% pre-IPO stake in MSJ to Intrepid subsidiary Emperor Mines, receiving a $70 million promissory note in return. The bond can be exercised once MSJ goes public. In addition, Emperor has the right to acquire a further 7.5% stake in MSJ for $37.5 million at the time of the proposed IPO. Intrepid has signed over these rights to Kendall Court for $40 million in cash plus a standby letter of credit also worth $40 million.

NEWS


COVER [email protected]

WHEN THE LETTER HIT DAVID RUSS’ DESK, the University of California Regents’ Endowment Fund had just under $650 million – or 1% of its total portfolio – invested in VC vehicles run by Sequoia Capital. Their relationship stretched back 22 years. But the missive from Michael Moritz, a partner at the VC firm, brought it to a swift close.

Sequoia was dropping the University of California from its latest fund, Moritz told Russ, the university’s treasurer, citing “the spate of Freedom of Information Act requests with which your office has been bombarded.”

With plaintiffs queuing up to demand the endowment release performance data for funds in its private equity portfolio, and several judges deciding disclosure was a good idea, Sequoia concluded that its privacy was worth more than the University of California’s continued custom.

Responding to the court ruling that triggered Sequoia’s rejection, Russ noted that he wouldn’t be able to replace the fund positions with similarly productive investments because they weren’t available. “This decision is going to cost the university hundreds of millions of dollars,” he added.

It was one of numerous actions, all of which took place more than a decade ago, that set the terms of certain US venture capital firms’ relations with investors that endure to this day. Public disclosure of fund performance by LPs is frowned upon to the point that it can be a deal breaker.

Blast from the pastSequoia’s exchange with the University of California has now resurfaced in an Australian context. Last year, the federal government passed legislation requiring superannuation funds to publish full details on their portfolio holdings on a look-through basis – in a PE context, not only identifying the funds but also the assets that each fund is invested in – on a publicly-available section of their websites twice a year.

Disclosures made by US public pension funds, the closest the industry has to a “global standard,” do not extend to the specific contents of PE managers’ portfolios. The standard reason is that revealing the value of unlisted assets could have a detrimental impact on investment performance. It is feared foreign PE firms will respond to the Australian regulations by

refusing to do business with superannuation funds, thereby potentially denying members the opportunity to invest in the top-performing managers.

The new disclosure system was supposed to come into effect on July 1, 2013 and is now nearing the end of a 12-month deferral. Following the change in government last year and a reopening of the consultation process, it is hoped the regulations will be amended to something nearer the global standard.

Several superannuation funds declined to speak to AVCJ on the grounds that the situation has yet to be finalized. However, the dilemma facing these LPs is what do they do right now – follow the law or be pragmatic and accept the law is likely to change?

“Although I believe the regime will change, it is not appropriate to make commitments on the assumption that the law will change,” says Andrew Major, general manager for investments

at healthcare sector superannuation fund HESTA. “Therefore, when we make a commitment, we have to be confident that we can comply with our legal obligations as they currently stand.”

Geoff Sanders, a partner at Allens who specializes in superannuation and funds management, warns that another deferral doesn’t necessarily rescue the issue. He is advising superannuation clients that are making new commitments to put side letters in place entitling them to disclose the relevant

information if and when necessary. However, a Hong Kong-based funds formation lawyer tells AVCJ that he is advising GP clients to refuse these requests and pass the risk back to the investors.

It is, as more than one industry participant observes, “a real mess” and the sooner the government steps in and offers a degree of clarity, the better for all concerned.

Best intentionsThe superannuation portfolio holding disclosure requirements emerged as part of the broad review of Australia’s financial services sector in the wake of the global financial crisis. Many superannuation members lost a significant portion of their retirement savings and so the government promised root and branch reform to ensure this couldn’t happen again.

The Cooper Report, published in 2010, identified a number of areas in which the superannuation system could be improved,

including a removal of the complexity and opacity surrounding investment products.

It advocated “systemic transparency,” whereby the trustee would disseminate a wide range of information on a superannuation fund’s processes and portfolio holdings via a publicly accessible website. This was meant to go above and beyond the existing requirement that a superannuation fund disclose all investments or combinations of investments with a value in excess of 5% of total assets.

Indecent disclosureThe Australian government is expected to halt and wind back superannuation fund disclosure requirements that go beyond global norms. Industry participants are hopeful for the best, but mindful of the worst

Australia pension asset allocation

Source: Towers Watson

0 20 40 8060 100

Other Cash Equities Bonds

%

2003

2008

2013


“I don’t think anyone would disagree with the fundamental premise of transparency and more meaningful information being put in the hands of end users,,” says Yasser El-Ansary, CEO of the Australian Private Equity & Venture Capital Association (AVCAL). “But this is a case of the pendulum swinging too sharply in the direction of over regulation, which will not deliver the outcome the government is looking for and will actually be detrimental to the interests of superannuation fund members.”

Indeed, it has swung past the point of comfort for most GPs. Lawyers attest that domestic managers have little choice but to comply with the new regulations, should they be

fully implemented. They are subject to Australian securities laws and therefore bound to provide superannuation funds with information required to meet disclosure requirements.

Offshore GPs, on the other hand, are not obliged to approve the disclosure of their portfolio holdings. Based on their discomfort with any fund information entering the public domain, venture capital firms in the US would almost certainly reject the notion out of hand.

“It would be a serious issue for the US VCs,” says Richard Baker, investment director at Blackbird Ventures, who until May 2012 was venture capital portfolio manager at MLC Private Equity. “I know freedom of information regulations in the US meant they didn’t accept some institutions that were subject to those laws. It would have a significant effect on the super funds and their ability to access these investments.”

Anecdotal evidence indicates that venture capital firms are threatening to exclude Australian investors from their products while the response from private equity has been more mixed, with some of the larger managers reasonably understanding of the situation. This is in keeping with their respective strategies. While the typical VC manager can be guarded about his investments, a big buyout firm would struggle to keep deals a secret given the need for approvals and the size of supporting infrastructure.

Problems can arise when confidentiality arrangements in the limited partner agreement (LPA) that specifically restrict the disclosure of information have to be renegotiated. If there is

no breakthrough with existing GPs, the LP is not obliged to exit the position on the secondary market. Rather, they can employ the “reasonable steps” defense.

“There is a point at which the super fund says, ‘We have taken all reasonable steps to get the information and we can’t. It is not reasonable for us to sell the investment because we can’t get the information, so we’ve done what we can do and need to do no more,’” explains Sanders of Allens. “We don’t see it being an issue in a practical sense for pre-existing investments.”

There is one caveat: the superannuation fund might already be in possession of the information through the GP’s standard quarterly reporting.

In this context it is questionable whether “reasonable steps” is valid. The fund might be compelled to disclose, regardless of whatever restrictions the LPA tries to impose, simply because the law does not respect confidentiality.

As for new investments, superannuation funds are drawing up side letters. GPs that are unhappy with this arrangement can walk away from negotiations and seek to raise capital elsewhere.

From an LP perspective, two issues have yet to become clear. First, would a trustee be able to make a commitment to a GP in the knowledge that the manager won’t budge on LPA amendments? Second, given private equity accounts for a relatively small portion of superannuation funds’ overall investments, are they prepared to devote the time and energy required to resolve these issues?

Superannuation funds say they are able to reach satisfactory outcomes with GPs, with one manager describing the default position as “an agreement to agree further.” However, there are also cases in which commitments haven’t been pursued, in part due to discomfort with GPs’ attitudes towards disclosure.

Red tapeIn addition to potentially denying superannuation members exposure to top quartile managers, the regulations would introduce a compliance burden beyond anything that Australian LPs have seen before.

To put this in context, the California Public Employees’ Retirement System’s (CalPERS) 2012

annual investment report, which offers the most detailed insight into its holdings, comprises 296 pages and 14,856 line items.

The bulk of these are public investment instruments, where the individual holdings are disclosed but the identities of the managers responsible for them, where the function is outsourced, are not. Real estate and real estate investment trusts account for 426 line items, infrastructure for nine, and private equity funds – divided up into corporate restructuring, credit, expansion capital, opportunistic and venture capital – for 349.

With $277.2 billion under management, of which $31.2 billion in deployed in private equity, CalPERS is a giant among the Australian superannuation funds. AustralianSuper is the largest, but at A$65.1 billion ($58.5 million) its asset pool is just over one fifth the size of its US counterpart.

In its 2013 annual report, AustralianSuper names 34 external managers for listed equities, 21 for global bonds, 32 for property, 30 for infrastructure, seven for capital guaranteed, absolute returns and cash, and 14 for private equity. Should this or any other superannuation fund be obliged to disclose the full extent of each manager’s holding it is estimated the list could run to 5,000-10,000 line items.

“It’s a very significant cost burden on superannuation funds and GPs,” says AVCAL’s El-Ansary. “At a time when we have a new government that has made reducing red tape and compliance costs on business its number one economic priority, this particular reform represents a very straightforward opportunity to stop the implementation of changes that will only serve to impose additional regulatory costs.”

Even if the government is comfortable with the compliance costs, there is a broader consideration of whether or not full disclosure actually benefits superannuation members. A balance must be struck between giving end users access to information in the interests of transparency and overwhelming them with so much information that only those with accounting backgrounds will be able to process it.

This point is reinforced by submissions made by AVCAL and other industry associations, including the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST), each of which calls for another deferral so the policy can be reconsidered and released in a workable format and with proper guidelines.

“Disclosure of fund assets (on a full ‘look through’ basis) will not assist members to better assess the level of diversification and risk in particular products of likely future returns,” ASFA


“This is a case of the pendulum swinging too sharply in the direction of over regulation, which will not deliver the outcome the government is looking for” – Yasser El-Ansary


states. “Such information will be too voluminous, not standardized and potentially too complex to be of assistance to retail investors.”

AVCAL also stress the need for an exemption for unlisted investments from the public disclosure of commercially sensitive information in order to avoid the breach of contractual confidentially arrangements. AIST takes a broader view, arguing that the exemption should apply “where it is in the best interests of members.”

The example given is an emerging markets fund that represents an excellent investment opportunity but is unwilling to see its assets disclosed publicly. In the light of the new regulatory requirements, a superannuation fund would either have to decline to invest in the fund or make a “blind” commitment. Both these outcomes could be considered sub-optimal and therefore detrimental to the interests of members.

Educated guessworkIn the absence of detailed guidelines, interpretations of the regulations are varied, particularly how information should be presented on a superannuation fund’s website. It is possible to create a scenario, for example, in which disclosures wouldn’t reveal much at all about a GP’s investment activity.

One pension fund manager tells AVCJ that his disclosures would amount to a company name and valuation – much like CalPERS’ policy for public debt and equities. There is no requirement to link the company to a fund manager, in part because four hedge fund managers could have a position in a single company, so the superannuation fund would aggregate its exposure.

As a result, people reading the disclosures wouldn’t necessarily be able to decipher an individual manager’s holdings.

“To really understand how a company is valued, you need to understand our percentage interest in the partnership; you then need to understand the partnership’s percentage interest in the company to get an equity valuation; and then to get an enterprise value you have to look at the debt,” the pension fund manager says. “There are a couple of steps to get to any clear valuation of a company using information that itself isn’t going to be disclosed.”

On this basis, while the disclosures are potentially quite material, once you drill down into the practicalities, the information might not provide a huge amount of insight into GPs’ investment strategies. This is just one interpretation, however – the product of a fund trying to establish where it stands on an issue in

order to prepare itself for when the government passes judgment.

Fortunately, this judgment, or at least another deferral of the implementation date, might not be long in coming.

AVCAL’s El-Ansary believes a compelling case has been made to the government for a proper debate on this reform and a proper examination of whether or not the balance between cost obligations and more meaningful information has been struck. Furthermore, the assistant treasurer is said to regard the issue as a priority and recognizes the importance of providing a clear signal to the industry.

The much-desired compromise solution appears likely, one that addresses the broad transparency imperative yet saves superannuation funds from awkward conversations with GPs in which they offer no definitive answers to questions about carve-outs for materiality and sensitivity.

“I am hopeful there will be some materiality thresholds introduced into the current disclosure requirements, or that there will be recognition that certain information currently required to be disclosed is confidential and proprietary,” HESTA’s Major adds.

Foreign GPs shouldn’t cancel marketing trips to Melbourne just yet.

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Risk Capital Advisors (RCA) is the market leader in advising on and structuring insurance solutions for transaction risks. With a wealth of experience across Asia-Pacific and an impressive track record of successful transactions, the RCA team provides expert, commercial advice on a range of transaction risk strategies and insurance-based solutions.

As the largest team in Asia-Pacific, RCA has a combined 60+ years of Private Equity, M&A and insurance experience, and is the preferred advisor to structure transaction risk insurance solutions.

In the past 5 years, RCA has successfully advised on and closed more than 400 transactions, making RCA the most experienced team in the Asia Pacific region.

The transaction risks we provide advice on include:

Warranties & Indemnities Tax Litigation Prospectus Liability Environmental Contingent Liabilities

De-risk your transaction with the market leaders in M&A insurance solutions

LONDON I MELBOURNE I SYDNEY

For more on how RCA can help contact Rick Glover on +61 401 123 235, [email protected] or visit riskcapital.com.au

Q: How has your PE portfolio performed in terms of strategy and geography?

MAJOR: Our portfolio had a strong year in 2013, with positive valuation momentum and strong distribution flows. Over the longer term, performance of the portfolio is moving closer to the benchmark and is consistent with that of listed equity markets. All strategies in various geographies performed well and there were no real weak performers in the portfolio. Investment activity in Australia remains relatively slow, however exit activity picked up as the IPO window opened and remains open, which augurs well for further exit activity and distributions to investors in 2014.

SIMPSON: QIC’s private equity was started in 2005 by a team with deep global experience and our investments have performed well to date. Direct investments, available at more attractive prices post-global financial crisis, have helped to boost returns, as have secondary fund purchases, venture and growth investments (mostly in the US), and emerging markets investments.

Q: How has your trustee board’s attitude towards private equity evolved?

MAJOR: Our board retains a cautious outlook on private equity and has supported a change in investment strategy and, as a result, our ongoing investments in the sector.

SIMPSON: Sentiment towards the asset class has fluctuated over the last few years:

some superannuation funds even closed their private equity programs. However, well-executed programs have performed well and demonstrated lower volatility relative to public markets, which have bounced around like kangaroos. We have noticed a gradual build-up of appetite for the asset class coupled with ongoing concern about

perceived high fees with no guarantees of alpha. There are more implementation options available post-financial crisis, which goes some way towards meeting these concerns. Excellent implementation and the correct alignment of interests are keys to success.

Q: What are the implications of Australian LPs reducing commitments to domestic GPs in favour of global mangers and other asset classes?

MAJOR: We are not actively reducing commitments to local managers in favour of global managers, nor are we currently looking to reduce our allocation to private equity in favour of other asset classes. We continue to believe that suitable returns

can be made in Australian private equity, although experience has shown that only the highest quality managers will be able to produce these returns. Our commitment size is increasing as our fund grows, giving us the ability to be more selective with our commitments and focus on a smaller number of high quality manager relationships.

SIMPSON: QIC Private Equity has from the outset sought the best global opportunities. Only 4% of the total portfolio is invested in Australia, in part because we believe that competition for deals had, until recently, been overheated. We expect our Australian exposure to increase as there has been some industry rationalisation, which has created a more attractive supply-demand situation. In fact, we are close to closing our second direct deal in Australia and are aiming to do more with a preference for agricultural services, mining services, and leisure – industries in which Australia has acknowledged competitive advantages. We are finding opportunities outside traditional buyout structures and pursuing arrangements that provide attractive capital for business owners.

Q: Are you seeing more co-investment opportunities? How do you manage internal resources to address these opportunities?

MAJOR: We see co-investments as an important part of a private equity investment strategy. We have executed a number of co-investments over recent years and will look to continue to

make co-investments selectively going forward. We utilize the resources and expertise of our external advisors for sourcing, analysis and execution.

SIMPSON: The team has extensive direct investment experience and we’ve been co-investing since 2007 and have closed 16 co-investments to date. We have a defined strategy focused on specific sectors and types of transactions, driven by close partnership with a select group of top-tier managers. While many investors remain aspirational or are relatively new to co-investing, we’re seasoned in this area have enjoyed good success so far.

ANDREW MAJOR & MARCUS SIMPSON | INDUSTRY Q&A [email protected]

Supers have their sayAndrew Major, general manager for investments at HESTA and Marcus Simpson, head of global private equity at QIC, share their views on PE performance and where the best investment opportunities lie

“We have noticed a gradual build-up of appetite for the asset class coupled with ongoing concern about perceived high fees with no guarantees of alpha” – Marcus Simpson

Andrew Major


[email protected]

THE STORY OF PRIVATE DIAGNOSTIC imaging business I-Med Networks is a familiar one in Australia. Acquired by CVC Capital Partners in a A$2.6 billion ($2.3 billion) deal in 2006, it was one of a spate of highly-leveraged buyouts that came to typify the years preceding the global financial crisis. CVC, fresh from almost doubling its money on a buyout of Ramsay Healthcare, had little reason to doubt its potential. Within five years, though, things had soured.

Bought as DCA, the business was later renamed I-Med, following the sale of its aged care arm to Bupa. But it couldn’t hide from its debts. In 2011, a group of 30 hedge funds led by Anchorage Capital and Fortress Investment

Group took control of the company. Meanwhile, one third of the I-Med’s doctors announced they planned to leave.

No single hedge fund had a dominant position and so no one was willing to assume control of the board. It was left to Allegro Funds to come in as a minority investor, facilitate CVC’s exit and lead the restructuring effort.

“Our aim was two-fold,” explains Chester Moynihan, managing director at Allegro. “First we would provide capital to fix the balance sheet, sometimes in partnership with hedge funds. Secondly, we would to get control of the business with like-minded people and drive the turnaround.”

While I-Med is by no means the only entry on Allegro’s track record, it is perhaps the most high-profile entry. As the firm seeks to raise A$200 million for its first institutional fund – it previously

managed ABN AMRO Capital II Fund, having been brought in as a replacement GP to tend to a distressed portfolio – I-Med will inevitably be name-checked.

The irony is that Allegro doesn’t expect to be doing many more of these deals. Most of the low-hanging fruit has gone and Australia’s distress investors are now looking elsewhere.

Happy coincidence “From a distressed investor point of view, it was a happy coincidence of three things going on: a number of overleveraged deals that were caught in a global slowdown; a group of mainly European banks were exiting the market quickly

and looking to sell out; and local banks often did not have the appetite or the remit to stick around through protracted debt-for-equity swaps so they sold as well,” says Alistair Dick, managing director and head of debt advisory and restructuring at Rothschild Australia.

On the leveraged buyout side, these low-hanging fruits included another CVC casualty, media conglomerate Nine Entertainment. Acquired between 2006 and 2008, the company ran into trouble as advertising spend plummeted following the financial crisis. Another hedge fund consortium, led by Oaktree Capital and Apollo Global Management, completed a debt-for-equity swap worth nearly $3 billion, wiping out CVC’s equity in the process.

The most notable transactions to arise from European banks beating a path to the exit – aside from trading out positions in LBOs to

hedge funds, which led to the debt-for-equity restructurings – were probably the Lloyd’s International’s sales of the BOS International portfolio.

The Blackstone Group and Morgan Stanley were among those to take advantage, forming a joint venture to acquire a GBP809 million ($1.25 billion) portfolio of Australian corporate real estate loans in 2012. That same year, KKR’s special situations unit teamed up with Allegro to acquire a portfolio of distressed corporate loans. A third sale, said to be worth A$371 million, went to Sankaty Advisors last August.

“The big wave of distressed activity that came post-global financial crisis has largely played itself out,” says Jamie Weinstein, co-head of special situations at KKR. “There was a lot of primary lending activity in 2005-2008 – a lot of it came from non-domestic banks and a lot of it went into LBO deals – and most of those positions have been cleansed. We don’t expect to see many big portfolio sales on the corporate side.”

According to a restructuring expert at one of the Big Four domestic banks, there is plenty of activity at the small end of the market. He is getting 10 files in the A$20 million space for every one file in the A$40 million space and nothing much at A$50 million and above. And these positions aren’t necessarily trading.

Australian banks didn’t suffer the adverse effects of the global financial crisis nearly as much as their European and North American counterparts and so they haven’t been under the same pressure to sell.

“It’s hard when we’ve been through a period of significant deleveraging and the volumes in the secondary market have gone down,” says James Marshall, a partner in Ashurst’s restructuring and insolvency group. “But it would

Sifting the strain The low-hanging fruit created by the post-global financial crisis troubles of highly-leveraged Australian companies has mostly been picked. Distress investors are looking in smaller and less obvious places

No. of deals

Australasia syndicated debt volumes

Source: Thomson Reuters LPC

150,000

120,000

90,000

60,000

30,000

0

300

250

200

150

100

50

0

US$

mill

ion

Dea

ls

Volume (US$m)

20062005 20082007 2009 2010 2011 2012 2013 2014YTD

“You do get situations where somewhat unexpectedly something happens to create a market and you see trading” – James Marshall


[email protected]

be wrong to say there has been a drop-off in activity.”

He argues that the opportunities have become more situational rather than following a particular trend. One example is surf wear company Billabong which got into difficulty in early 2012 after accumulating debts more than A$300 million. The company had been the subject of early takeover bids from Bain Capital and TPG Capital but after proposal were rejected, lenders started to off-load their debt exposure to the group.

The company then became the subject of competing offers from two US consortiums: one led by Altamont Capital Partners and Blackstone unit GSO Capital Partners; the other by Centerbridge Partners and Oaktree Capital Management. Billabong initially negotiated a $294 million refinancing deal with the Altamont-

Blackstone, but later accepted a sweetened offer Centerbridge-Oaktree.

“You do get situations where somewhat unexpectedly retailers and other businesses get into difficulty and something happens to create a market and you see some trading,” adds Marshall. “This will continue to be a factor of this market. The deals have got smaller but there are still plenty of them out there.”

Indeed, turnaround specialists like Allegro are targeting the smaller positions held by domestic banks, looking to leverage their operational expertise to work out difficult situations that banks don’t want to address or no longer have the manpower to address. Moynihan credits the large debt sales with alerting the banks’ restructuring divisions to the role private equity can play in resolving non-performing loans.

“It started with the institutional and now

it’s moving into the corporate,” he says. ”We are seeing a mixture of family-owned businesses, some public companies, and a smattering of private equity-owned portfolio companies.”

The question is where does leave the large-cap players. The hedge funds do appear to be less active, content to fly in for intermittent opportunistic plays along the lines of Billabong. As for KKR, Weinstein says the focus is on private credit, which could involve mezzanine lending as part of a financing package or direct lending to a company, and broadly defined special situations plays. He notes that the firm is willing to do deals as small as $50 million.

Asset heavyThese special situations opportunities may well arise from the asset-heavy sectors, with several industry participants highlighting the potential of agriculture, real estate, infrastructure, and especially mining. Junior miners are the classic distressed case. Hit hard by the downturn in the commodities cycle, they either have too much debt on the books or want to raise capital but cannot because of falling commodities prices.

However, distress is not confined to mining companies. Ancillary service providers and equipment manufacturers have also been impacted and demands on working capital, low margins and large project risks are expected to create further challenges. For example, earlier this month listed engineering company Forge Group went into administration following weeks trading halts and profit deterioration.

“There are a lot of small to mid-cap mining service companies still reliant on one or two clients,” says Chalothorn Vashirakovit, investment associate at Clearwater Capital Partners. “This has presented a lot of opportunity in the past when clients have pulled back on their projects or renegotiated their contract terms and companies have faced a tremendous amount of stress- those are opportunities which we think are quite interesting.”

As to whether actual mining companies will emerge as investment opportunities, industry participants are less certain. Bert Koth, managing director at Denham Capital, notes that, while on paper the average listed junior miner may appear to have another six months before it runs out of money, the reality is the company will likely reduce its cash burn rate until it effectively goes into hibernation.

“When you have a cash crisis there is the opportunity to buy assets at a lower valuation but most junior mining companies do not constitute attractive mining companies, so the opportunity set is a little bit exaggerated,” says Koth. “Like in every market you have to look hard.”

Mean fields: Agriculture in distress Drought has made the precarious situation of Australia’s cattle farmers a whole lot worse.

With 70% of rural Queensland parched, land values are falling and banks are calling on cattle station owners to pay down a portion of their debts of face foreclosure. It is a vicious circle. One distressed farm sale in area pushes down valuations of the surrounding properties, collateral disappears and the process starts over.

Farm debt in Australia has risen from A$40.3 billion in 2004 to A$70 billion, of which A$5-10 billion is classified as distressed. There have been calls for the government to step in and clean up the worst positions. PE investment would also be welcome, but is it economically viable?

“The agriculture sector in Australia is ripe for foreign investment and remains overleveraged and quite illiquid,” says James Marshall, a partner in Ashurst’s restructuring and insolvency group. “Australian banks are struggling with some of their exposure and there is a lot of interest in how foreign investors might assist through roll-up strategies.”

There are two types of farming operation in Australia. At one end of the scale are the corporates, with assets of A$500 million to A$1 billion that are able to raise new capital and get their debt down to a sustainable level.

Even then, large players are not immune to difficulty. Having lost approximately A$1.7 billion over the last five years, Elders has been forced to downsize and restructure its debts. Namoi Cotton sold a stake to US agricultural trader Louis Dreyfus Commodities at the start of 2013 amid concerns about its ability to service debts and stay in business. And then there is PrimeAg whose shareholders voted to wind up the business last October.

At the other end of the scale are the mom-and-pop farms. Typical distressed cases started with the acquisition of a neighboring farm, backed by debt. After five bad years in a row the debt has swollen from A$10 million to A$20 million and is now worth more than the collective value of the land and the cattle on it.

“There are lots of people in that A$10-30 million exposure range who are in trouble, rather than one owner with a distressed position of A$300-400 million,” according to a restructuring expert with one of the Big Four banks. “There is an opportunity to do a roll-up and someone will eventually do it. Then the drought breaks, cattle prices go up, the Australian dollar depreciates, and it’s happy times again.”

There are plenty of strategies and purported opportunities, but as yet no significant activity. Politics – and the potential for government intervention in the sector through a state-backed reconstruction bank – may be partly responsible for private sector hesitancy.


[email protected]

SIX VENTURE CAPITAL PARTNERS ARE sitting in their Sydney office looking for potential deals. They have a mandate to invest in Australia and New Zealand but without a permanent on-the-ground presence in the likes of Perth, Brisbane and Auckland, even the most astute networker would struggle to assemble a full opportunity set.

Technology – in the form of crowdfunding platforms – can extend these investors’ reach. An entrepreneur from Perth appears on the radar without anyone needing to get on a plane. Initial due diligence can also be conducted through the online platform, with video chat and document sharing. Suddenly VC investors and start-ups have been brought closer together.

“Crowdfunding enables start-ups, especially those in the high-tech sector, to speed up their capital-raising process,” says Jason Best, co-founder of industry consultancy Crowdfund Capital Advisor. “They can get it done in four weeks rather than 6-9 months.”

The global crowdfunding craze is only two years old. An estimated of $5 billion was raised through these platforms in 2013, almost doubling the 2012 total. Crowdfunding has also taken off in Australia, with the Australian Small Scale Offering Board (ASSOB) facilitating more than $135 million in start-up funding last year. The country’s traditional VC industry saw investments totaling $149 million.

Last week, two more platforms launched Australian operations: Israel-based OurCrowd and VentureCrowd from local player Artesian Venture Partners. Private equity firm M.H. Carnegie & Co. is expected to join them with The Crowd in the next few months.

“I’m sure there will be more competitors, which will be both a validation of the sector and a good result for start-ups and investors,” says Jeremy Colless, managing partner of Artesian and founder of VentureCrowd.

Meeting a needAustralian venture capital fundraising has struggle ever since the global financial crisis. According to AVCJ Research, VC firms raised only $37 million and $96 million in 2010 and 2011, respectively. Last year, the total soared to $250 million, the highest level in six years. However, the bulk of this capital went to the Medical

Research Innovation Fund, which is managed by non-profit organization AusBiotech and part-bankrolled by the Australian government.

Industry participants say the superannuation funds no longer have an appetite for domestic venture capital, prompting newer firms to look elsewhere for support, notably US VC players and high net worth individuals (HNWIs). The rise of crowdfunding can be seen in a similar context.

It has gained traction almost by necessity, providing capital to entrepreneurs who would not otherwise get any, and presenting HNWIs with a pipeline of potential investments.

It is, however, important to separate the gift givers from the professional investors. While the likes of Kickstarter and Indiegogo, which match investors with entrepreneurs and offer tangible awards to the former for backing the latter, are present in Australia, ASSOB, OurCrowd and VentureCrowd operate under the equity model. They invest in start-ups and then take them to the platform to source capital from the crowd.

Traditional venture capitalists are obviously far more interested in equity-based platforms. There is the same element of quality control and business development support, yet the capital-raising mechanism has a much broader reach.

“I think the fundraising environment for early-stage companies will shift towards crowdfunding platforms to allow access to a national and international investor base,” says Zachary Midalia, investment associate at M.H. Carnegie & Co. “Crowdfunding allows people to invest smaller amounts of money across multiple deals and build their own portfolios. Whereas VC has traditionally been private and exclusive, crowdfunding opens it up to every investor.”

It is also suggested that crowdfunding fills a gap in the market. While an individual angel investor is generally reluctant to go beyond $500,000, a traditional VC fund in Australia might not write checks smaller than $10 million. Crowdfunding has the capability to exist in between, typically focusing on companies at the seed or Series A stage.

Furthermore, these platforms can address particular market niches, be they defined by geography, sector or size. There is no remit enshrined in a limited partner agreement, although those running the platforms recognize the merits of diversification.

OurCrowd, for example, focuses on global companies for individual global investors. It conducts in-house due diligence, selects promising start-ups and invests $50,000 of its own capital before opening the funding round to its accredited wholesale investors.

Only 16 new companies are expected to be selected this year and they will all have a presence in multiple markets. “We are only looking for companies that want to address worldwide markets. If a company doesn’t have plans to go global, we are not interested,” says Jonathan Medved, CEO of OurCrowd.

The platform itself has aspirations to grow beyond Israel and Australia, with New York, Hong Kong and Singapore on the agenda. It claims to have built a network of 4,000 investors in the past year, with 50-100 newcomers each week. Individuals commitments begin at $10,000.

“Being only local doesn’t make sense today,” Medved adds. “Last year we invested about $34 million in our deals. That may not sound like a lot, but for a typical VC it is a lot for a single year. A VC firm might raise $100 million and invest only $15-20 million a year, because capital must he held back for follow-on investments and fees.”

VentureCrowd is arguably OurCrowd’s

The IT crowdAustralia has embraced crowdfunding as a supplement to an early-stage traditional VC market that has yet to regain its former strength. Industry participants are seeking differentiation and deregulation

No.of crowdfunding platforms in selected countries Country Platforms

USA 344

UK 87

France 53

Canada 34

Netherlands 34

Spain 27

Germany 26

Brazil 17

Italy 15

Australia 12

India 10

Russia 4

South Africa 4

Belgium 1

Hong Kong 1

China 1

UAE 1

Estonia 1

Source: Crowdfund Capital Advisor

[email protected]

polar opposite. It concentrates exclusively on Australian investors, having opened with 200 registered participants and 36 start-ups that were pre-screened by more than 25 accelerators, incubators, and angel groups and university programs. The minimum investment is $1,000.

“There are over 200,000 wholesale investors in Australia managing more than $680 billion in assets. Even if equity crowdfunding platforms

access just 0.04% of this market it would match the paltry $300 million that VC firms invested in Australia in 2013,” Colless says.

For M.H. Carnegie & Co’s The Crowd, the differentiating factor will be size. The platform is being positioned as a later-stage specialist that is used to raise additional capital for portfolio companies already seeded by M.H. Carnegie & Co. through its venture funds.

“We are interested in Series A onwards,” explains Midalia. “We have many deals that require follow-on capital and as a fund we will

invest in various degrees in all of them. The platform allows co-investment from people outside our funds.”

In this respect, The Crowd is the odd-man out in Australia’s crowdfunding space. It wants to attract capital for companies that already have venture capital backing; the other equity-based platforms as looking to bring potential deal flow to traditional VC players.

Crowdfunding operates in the space from seed rounds through Series A, but rarely higher in the institutional spectrum – the platforms aren’t able to provide that quantum of capital and they are not set up to contribute on-the-ground operational expertise.

“It’s very early for these platforms in terms of understanding their operational dynamic,” says Gavin Appel, a partner at Square Peg Capital, a growth stage venture firm that focuses on internet technology investments. “There may be opportunities for collaboration between the

people running the crowdfunding platforms and VCs, to cooperate and co-invest together.”

The long gameAs it stands, crowdfunding tends to be limited to high-tech start-ups, but over time Crowdfund’s Best expects it to extend into new areas, starting with those that share borders with the tech space, such as medical device manufacturing and drug development. Models for collaboration with the crowd will emerge for different sectors.

The growth driver could come from the Australian government. Regulators are considering revisions to equity-raising laws to making them compatible with crowdfunding. This would involve easing restrictions on capital-raising outside public markets, which is capped at A$2 million or 20 investors in a 12-month period. Exemptions are made for sophisticated or wholesale investors and it is here the government could be more accommodating.

“I would like to see a relaxation in the definition of a wholesale investor, which would allow a larger universe of investors to support the future of innovation,” says VentureCrowd’s Colless. “Encouragingly, Australian Communications Minister Malcolm Turnbull recently flagged support for the potential of crowdfunding models to address Australia’s lack of VC investment.”

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“I’m sure there will be more competitors, which will be both a validation of the sector and a good result for start-ups and investors” – Jeremy Colless


[email protected]

OZFOREX HAS COME A LONG WAY FROM its humble beginnings 16 years ago, when the company was run out of a spare room in a house in Sydney’s northern suburbs. It is now one of the world’s largest online foreign exchange platforms, with 170 staff, offices on four continents, partnerships with Moneygram and Travelex, and A$9.1 billion ($8.2 billion) in transfers last year.

In October 2013, OzForex went public on the Australian Securities Exchange (ASX), raising A$440 million through its IPO and providing exits for The Carlyle Group, Macquarie and Accel Partners. The offering was priced at 12.7x the company’s forecast earnings for 2014. A number of potential acquirers were circling the company ahead of the offering, say people familiar with the situation. None of these groups was willing to pay anything like the multiple OzForex thought it could obtain via the public markets.

It is a familiar refrain. While Australia’s record year for private equity-backed IPOs in 2013 has presented managers with much-needed liquidity events, it has pushed up the valuations being asked of those looking to buy.

“People see businesses out there at 10.5x EBITDA or more and they think their companies are worth the same amount,” says David Willis, head of private equity at KPMG Australia. “I know of several forthcoming IPOs that also have a trade sale mandate and, even at the low end of the bankers’ book range, it is still a way off what trade and secondary PE buyers are willing to pay.”

The view is echoed by a regional buyout manager who claims to have seen a number of deals fall through because the sellers are looking for higher valuations at IPO. “The investment banks tell them 12x is possible and the sellers believe what they want to believe,” he adds. “In some of those cases the companies have yet to go public.”

Mixed feelingsAccording to Thomson Reuters, 44 offerings between them generated A$9.6 billion in 2013, the largest annual total since before the global financial crisis. More than one third of these IPOs and close to two thirds of the total proceeds came in December alone. According to AVCJ Research, nine PE-backed offerings raised a record $2.5 billion, up from $156 million from three IPOs the previous year.

The headline PE investment numbers also look impressive, with $12 billion deployed, a 25% gain on 2012, although more than half came from two infrastructure deals. Mega transactions in this area are not uncommon – indeed, they accounted for a sizeable portion of the previous year’s deal flow. But the more telling difference between the two periods is the drop in activity in the middle market.

In 2012, 14 deals were completed with an enterprise value of more than $150 million; four were in excess of $750 million and five were below $300 million. Last year, the deal count fell to 12, of which three came to more than $750 million and six were below $300 million. The number of deals in the $300-500 million range dropped from four in 2012 to zero last year.

Both Pacific Equity Partners (PEP) and CHAMP Private Equity, having each deployed in excess of $1 billion in 2012, were far less active last year. Quadrant Private Equity saw a less substantial drop – from $856 million to $420 million – while Archer Capital’s increase came after a relatively quiet 2012.

For PEP and CHAMP, the last 12 months have been spent digesting the earlier glut of deals. John Haddock, managing director at CHAMP, admits that in 2013 the firm was “more portfolio company focused,” after completing three buyouts and one substantial bolt-on acquisition the previous year. PEP’s annual average deployment is A$550 million equity; in

2012 it invested double that amount. Similarly, Archer’s slow 2012 followed a year in which it also committed more than $1 billion.

“You are given 5-6 years to invest the money it doesn’t always work out as two companies a year for 10 in total,” Haddock explains. “There are ups and downs, and then once you’ve made investments there is work to be done. It’s the job of the manager to take into account all those constraints – getting the money deployed and how quickly you deploy it.”

Of course, this doesn’t mean private equity firms stopped looking for potential deals.

PEP estimates there are 1,700 companies or entities in Australia and New Zealand of A$250 million to A$1 billion in enterprise value that meet its broad investment criteria. On average,

the GP will look at 80 per year or less than 5%, of which 14-15 are taken forward for deep due diligence. The number of deals presented in 2013 was down slightly, but the standard 14-15 were attractive enough to warrant closer consideration.

“We saw the same number of quality deals that we liked – many more in the second half than the first half, but in line with the 10-year average – but the number of those deals that actually traded by calendar year end was significantly down,” says Tim Sims, co-founder and managing director at PEP. “They were put into the market, entered a process or we bid on them and the vendor has not yet dealt the asset.”

Industry participants offer numerous

Patience is a virtueDue to a combination of factors, not least the revival in Australia’s public markets, mid-market private equity deal flow was slower in 2013 than previous years. GPs are waiting for conditions to become more opportune

Australia mid- and large-cap PE deal �ow

Source: AVCJ Research

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Dea

ls

30

25

20

15

10

5

0

$501-750m (US$m)>$751m (US$m)$76-150m (US$m) $301-500m (US$m)

$151-300m (US$m)


[email protected]

reasons for deals failing to transact, and not all agree that the public markets revival had a debilitating impact. CHAMP’s Haddock observes that, although IPOs present another option to business owners who might otherwise sell to private equity, an active market is also an optimistic one and this can facilitate deal flow.

Indeed, the general upward trajectory of the S&P ASX 200 mirrors feedback on business sentiment and conditions in National Australia Bank’s latest monthly business survey. Conditions – an average of the indexes on trading conditions, profitability and employment – swung from a multi-year low in the second half of 2013 to a three-year high in December. Business confidence subsequently improved for the first time in four months in January.

NAB said that “confidence may continue its run of surprising (post-election) resilience for a while longer,” perhaps a nod to its assertion made in August of last year that elections historically haven’t delivered an immediate improvement in business sentiment.

However, Sims argues that the long nine-month run up the announced election contributed to a period of uncertainty and temporary lull in PE investment, in line with well established precedents in other markets. Uncertainty in terms of the crucial future of carbon pricing, to name but one example, was a factor in the reduced deal flow.

In addition, domestic corporates in particular were reluctant to bring divestments to a head in the second half of the year because in a climate of low cash rates and appreciating stock markets, they were not under pressure to act. Some prefer to wait until the end of the financial year in June and take the full consolidated earnings of a business before selling; others hang on because they think the valuation tide is rising.

“If you have a buyer that has done the work and is interested and engaged and you think you know what their walk-away position is, then you may take the chance and hold out a bit longer,” Sims says.

Silver liningWith UGL weighing up offers for its property services unit DTZ, Transpacific Industries looking to sell its New Zealand waste management unit, and Orica mulling an exit from the chemicals business, there is evidence to suggest that corporates are now examining their portfolios with a view to focusing on core operations.

More M&A activity is expected in the mining sector, where large players are considering asset sales and their smaller counterparts are struggling to raise capital required to stay in operation. It is hoped this will result in a few more sizeable leveraged buyouts come onto the

traditionally lumpy Australian market, but even if assets are put on the block, there is no guarantee PE firms will be interested or able to execute.

Just last week, Shell offloaded its Australian refineries and service stations to Vitol for $2.6 billion. Further down the scale, Catalyst Investment Managers has exited broadcaster Global Television and refrigeration systems supplier Actrol Group in the last two months, to an international trade buyer and a domestic trade buyer, respectively.

“We have seen the reemergence of the trade buyer,” says Russell Sinclair, head of the acquisition finance division at Westpac. “Australian corporates have enjoyed a rise in their stock prices rise but that natural lift is slowing. As a result, they are re-leveraging, with a focus on growing their businesses, leading them to examine capital expenditure opportunities and acquisitions. This means more competition for PE firms, which has the potential to increase prices.”

For many private equity investors with assets in Australia, the first half of 2013 was also a period of re-leveraging as deals were refinanced. In some cases, terms were improved, allowing for dividend recaps. Term Loan B was the flavor of the month for a while, as managers made the most of the opportunity to secure competitively priced financing out of the US. Since mid-2013 the industry has been preoccupied with IPOs.

With most of the refinancing efforts now completed and local banks recognizing borrowers’ capacity to leverage earnings – plus

a return of subordinated or mezzanine debt layered on top of the senior tranche – Sinclair believes there stage is set for more investment activity in 2014. This confidence is shared by CHAMP’s Haddock, who expects to complete a couple of acquisitions in the next 6-12 months based on the deal flow he is seeing.

The unknown factor is the public markets and whether strong liquidity will continue to present business owners with an alternative to PE.

While the window remains open, investor appetite is not unlimited and the recent pricing of CHAMP Ventures-backed SG Fleet’s offering towards the low end of its indicative range might be a harbinger of things to come. KPMG’s Willis warns that the next four months will be a telling period, with institutional investors likely to become pickier about the IPOs in which they participate and how these offerings are priced.

“There are groups aiming for a first half IPO and my guess is that they are trying to get there as quickly as they can,” says Mark McNamara, global head of private equity at King & Wood Mallesons. “There will some that fail to go public and look at other options.”

If and when these groups stop playing the waiting game, a raft of transactions may open up for trade and private equity buyers. “When vendors decide to sell businesses they tend to get sold and if not in one window then in the next, you can see this in the data over nearly 15 years” says PEP’s Sims. “These deals don’t disappear; they simply take longer to conclude.”

Largest Australian PE deals, 2013Date

Amount (US$m) Investee Investor

Apr-13 5,271.7 Port Botany & Kembla IFM Investors; ADIA; AustralianSuper; Construction & Building Industry Super; HOSTPLUS; HESTA

Nov-13 916.3 Port of Brisbane Caisse de depot et placement du Quebec

Mar-13 901.7 Inghams Enterprises TPG Capital

Sep-13 733.8 Tourism Asset Holdings ADIA

Mar-13 646.5 Nextgen Networks OTPP

Sep-13 582.8 RiverCity Motorway Group Queensland Motorways; QIC


Largest Australian PE deals, 2012Date

Amount (US$m) Investee Investor

May-12 2,351.1 Sydney Desalination Plant Hastings Funds Management; OTPP

Mar-12 917.4 Extract Resources China Development Bank Capital

Dec-12 853.4 Talison Lithium Chengdu Tianqi Industry; CIC

Apr-12 755.2 Spotless Group Pacific Equity Partners

Mar-12 668.0 Transurban Group Future Fund; RARE Infrastructure

Aug-12 414.0 Super A-Mart/Barbeques Galore Quadrant Private Equity


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Q: Several of the larger Australian GPs invested less heavily in 2013 compared to previous years. Is this cause for concern?

A: If you look at the broad M&A market, last year was fairly quiet in Australia. It is also not unreasonable to say that the election resulted in lower corporate strategic activity because people were waiting to see how things panned out. Dry powder is still available but a number of firms focused more on generating liquidity either through refinancing or outright exits, either strategic or through IPOs. We aren’t worried about the slower investment. We still see Australia as an important private equity market in the Asia Pacific context and we will continue to see deal activity.

Q: If a manager deploys at a slower pace than expected in the early stages, what does this do to the j-curve effect?

A: The j-curve effect is always there. It is something investors in private equity need to live with, but at the same time it is something we can mitigate in the portfolios we construct – we don’t only invest in primary funds but do secondary transactions and co-investments as well. At the end of the day, it is more important for us that managers are disciplined and stick to strategy. If the pressure to invest is too great, the risk is that managers start doing deals that are either overpriced or ill conceived, and this has a much greater impact on the long-term performance of a fund than the j-curve. In general, you do see some investors getting nervous when they see a manager hasn’t

done much for two years or more, but the reason GPs have 5-6 year investment periods – and funds have 10-year life terms – is so you can avoid the issue of needing to deploy capital immediately. The j-curve is not the driving parameter; it is all about the ultimate return.

Q: With the revived IPO market, a number of GPs have seen liquidity events and in some cases full exits. Is a full exit on IPO always a good thing?

A: As an investor, it is good that the GP can achieve liquidity at the get go. In China, lock-up periods can be as long as three years, which isn’t great. Having that flexibility to sell down a significant stake – and I do think 100% is less likely these days, 70-80% is reasonable – for the right deal with the right sponsorship is feasible.

Q: Do you feel that retail investors would be reassured if private equity firms made incremental exits?

A: The capital markets in Australia are deep, well developed and there is significant investor experience, so you don’t really need that type of hand-holding. And if you look at the quantum of retail capital versus institutional capital, the institutions are of course by far the largest player in that market. I don’t think the data support the argument that private equity guys are listing companies at the highest possible valuation and then exiting before the stock sinks. These stories come up from time to time, but there is a reason institutional investors keep coming back to new IPOs underwritten by PE firms. They

realize every deal stands on its own. What is most important to a new investor in an IPO is that the management team remains properly incentivized through equity ownership and participation in the company. If

they cash out you would wonder what their incentive is to keep working.

Q: Australia stands out in Asia because of the number of buyouts. Does this mean you are a more active co-investor there than in other markets?

A: Co-investments don’t only happen in buyouts – we co-invest in venture, growth equity and buyouts. And as to buyouts predominantly happening in Australia, I think that is changing.

In China, about 60% of all investment activity by value in 2013 was in buyouts. Clearly, the data are skewed by some very large transactions like Focus Media, but we are definitely seeing more buyouts. We are also seeing increased activity in India, and then Indonesia and Malaysia are as much buyout markets as they are growth equity markets. Co-investments in part depend on how experienced the GP is in running an efficient and effective process. We don’t always see this experience in emerging markets, but in Australia GPs tend to understand the dos and don’ts, and there is no need to spell everything out. It is a pleasant environment to work in.

Q: What is Australian LPs’ appetite for foreign versus domestic private equity?

A: Australian LPs are still investing in domestic private equity but it’s true that the overall quantum of commitments to Australian GPs has come down. Some of these groups haven’t done much outside of Australia and they come to us and say they want a more globally diversified portfolio, but it’s hard to say whether that fully replaces what they are doing in Australia or only partially offsets it. At the same time, a number of superannuation funds are playing catch up in terms of their general PE exposure. They recognize they made some commitments in the past but in hindsight these were too small because they are seeing significant inflows and growing rapidly. They need to make much bigger commitments and more quickly because they aren’t meeting target allocations.

SEBASTIAAN VAN DEN BERG | INDUSTRY Q&A [email protected]

Delivering down underSebastiaan van den Berg, managing director and head of Asia at HarbourVest Partners, discusses his expectations for Australian deal flow, best practice for IPO exits, and co-investment opportunities

“At the end of the day, it is more important for us that managers are disciplined and stick to strategy”

bvdinfo.com

[email protected] +61 2 9 2233 088

The ultimate company information solutions for corporate finance research

Bureau van Dijk’s products are renowned for their detail and coverage. Simple to interpret and manipulate you can research companies and M&A deals quickly and comprehensively.

Register for your free trial – bvdinfo.com/freetrial

Find target companies for acquisition and to generate deal flow

Get company financial data and multiples for company valuations

Get information on corporate structures – directors, owners and subsidiaries

Research and analyse companies internationally

Do a detailed analysis of a company, including financial analysis

Use our current, historical deal information – and rumours

Create Pitchbooks

Pull data into your own models

Create league tables

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