What do you make of the current deal environment?
Greg Minton (managing partner, Archer Capital): We've invested no money out of our new fund. We've looked at a range of opportunities in the last nine to 12 months. Last year was a busy year so we are pretty happy to be spending time bedding down our portfolio. That said, we have gone a long way into a number of processes but haven't met vendor expectations.
Rob Koczkar (managing director, Pacific Equity Partners): I don't think it's ever easy getting things done. I don't think the current environment is particularly different to that on a deal-by-deal basis. We have all had good deals and good years in terms of putting money to work and finding deals to do. There are not hundreds of assets lined up by investment banks to be sold in auction processes as we've seen in other parts of the cycle.
Chris Hadley (managing director, Quadrant Private Equity): The fact that it's not hugely competitive on buying assets equally applies for selling assets. In the market today, everything is taking longer and it's harder. But good assets will sell and are selling. We've seen that.
You have got to pick your sectors obviously and this is a time where we would probably focus more on defensive type-businesses that can actually come through these periods relatively well. It's tough for everybody obviously, but we are looking for that dual sort of defensive and growth business.
Minton: It's true, our best performing portfolio companies across our history have been ones with good growth. Saving has been a hard way to make money in private equity.
Is the lack of debt a constraining factor in getting deals done?
Minton: There is not a great deal out there. We can probably get debt multiples similar to what it was after September 11 , so it's back to the future a bit.
Koczkar: If you go back to when we started this business, we had to go to New York to get a $50 million cheque written for our first transaction because no one knew what leverage was here. In these very difficult, closed markets we got $900 million of facilities for Spotless. So it is sort of a bit back to the future in terms of leverage, but we have also gone a long, long way forward.
I don't think we've found any problem in raising capital to support of any assets that we were looking to buy. Fundamentally our starting point is always what's the operating strategy going to be, how do we think we're going to make money out of that business and actually make it a good investment.
If you can do that and you can then develop a good plan around a cohesive team then I think the capital does become available. The banks are pretty supportive of the right sponsors doing the right type of deals.
Which sector would you be hesitant to buy an asset in?
Minton: Probably retail. I think we would like to see how the internet's impact on retail plays out. The fact that some brands sell products at a much lower price in the US or Europe than they do to Australia needs to be fixed.
Koczkar: There are a number of sectors, retail is probably the most obvious, that are impacted by technological change and the internet. Where those things are unclear, we're pretty cautious. With something like the impact of the internet on retail, I just don't know where the bottom is.
Hadley: Having just bought a retailer, I think the comments are valid. My overriding comment would be that we would probably shy away from industries in terminal decline. We're looking for growth businesses in growth industries.
What is it like refinancing assets in situations where you cannot find the right buyer?
Hadley: We just recapped Virtus Health the week before last which was a point in case where we have an expectation of price on that asset, as we will for our best businesses, in the interim we have refinanced it. If you can re-gear it, which we have, four times which is fine, you can run it for another two years.
Minton: It is a difficult market to do recapitalisations. Our ability to convince the banks to re-lever good assets and remain in the same hands has also been pretty low of late. We are in the leveraged buyout industry and running around with businesses with 1.2-times leverage is not an efficient use of capital.
Industry Funds Management has moved to set up its own in-house private equity team. Is this a threat to managers like Archer and Quadrant?
Katherine Woodthorpe (CEO, AVCAL): Industry Funds Management is a slightly unusual beast. I think their idea is reflective of their own particular strategy. I haven't heard of any others looking to effectively take over the role of the GP (private equity manager). They simply don't have the resources to do that in house and I can't imagine that many of them would contemplate it.
Hadley: I'm not commenting on IFM specifically, but what we can say is the captive model here and overseas in private equity hasn't worked that well. From time to time people will try different things and obviously some will work better than others.
Does private equity need a strong initial public offer market to be successful?
Koczkar: We always want as many buyers as we can and so it would be great if the private markets were wanting to pay a lot for our assets. But it doesn't affect the fundamental day-to-day process of generating value in companies and building towards an exit.
Minton: I think the other thing that we need to bear in mind is when we bring businesses to market for an IPO, whether it be late this year or next year, investors will be able to see how they've performed over the pretty tough period of 2007 to 2012 and go, "Gee, you know, is this a robust business or not."
What type of businesses can be floated?
Hadley: At this point in the cycle, there isn't anything that makes a good IPO because it won't happen before Christmas, certainly not from PE. The market will open at some point next year. It's probably going to be for a defensive high-quality type of asset. When the IPO market comes back, it might change the way we operate in that market.
Are global private equity players squeezing out Australian firms?
Koczkar: I don't see any trophy type deals being done at the moment, nor do I see the conditions for them to be done in the next little while. But Australia is a very good place to deploy private equity capital and I think as an industry we continue to deliver returns in excess of the public market comparables.
Minton: We also see where some of the globals will come down and want to buy businesses off us because they can take businesses to the next phase of growth. A perfect example of that is Bain Capital buying MYOB off us. They have the resources to potentially take that to Asia and other parts of the world that we just don't have. We're a country manager only.
Is private equity an industry in consolidation?
Woodthorpe: I think somebody described it as an incredibly Darwinian asset class. People who don't do a good job don't raise their next fund and so there will always be some dropping off the pile. That's just the way it works.
Minton: You could say that some managers may go down in size. Some have come from being a three or four or $500 million fund and are now much larger. I think that investors will credibly like you as a manager, but you're much better at expansion capital deals up to two or $300 million than you are at billion-dollar deals.
In the wake of the Spotless takeover, should Australia's takeover laws be changed to make it easier for buyers to approach boards?
Koczkar: There are lots of things that you could change it to make it easy for us to do. But I don't think that's the right balance. On Spotless, the shareholders saw an offer that we put to the company and they were able to accept it. Now was that done in the shortest period of time possible? Clearly not, but it was done in a way that gave everybody a fair say.
Are public company boards sick of private equity approaches?
Minton: To the extent that the private equity industry makes bids and then doesn't stick by those bids because they've not been given the opportunity to do due diligence, well, that's just the business we're in. We do want to do due diligence before we commit our money.
Koczkar: The other thing that gets trotted out by boards and especially in an initial response is how conditional the offer is. The way we source our funding, our fiduciary requirements to our investors means that we do actually have to go and inspect the companies in some detail because we are such an an illiquid asset. You don't have the opportunity to buy shares, change your mind two days later and sell some. We're there for the long haul.
Minton: That due diligence process can actually be of real value to the management team in testing their strategy and testing their thesis.
Are there any plans for fundraising?
Koczkar: We've deployed a lot of capital this year. We've still got some to go, but it's a continual conversation with the investors as to when we'll actually come to market. That will happen over the next little while, but I don't expect it to be this year.
Katherine, what is happening in the venture capital industry? Are many deals being done?
Woodthorpe: VC is very busy. There has been lower fundraising in recent years, but there has been fundraising and therefore there has been money deployed. The funds that were raised a while ago have mostly been that the initial investment for new investments has been completed and the funds that they still have available for investment as follow-ons to investees that they already have in their portfolio, but we have three or four new fund managers over the last couple of years with fresh money.
So they're investing that and there's a big IIF round due, it's underway in terms of the process at the moment, but it will be announced potentially and hopefully at the back end of this year or early next year which will deploy a hundred million of government funds which has to be matched by a hundred million of the private funds, so a $200 million injection into the VC industry. So VC is not as strong as it was, but it has by no means disappeared. It is still an incredibly important part of commercialising early stage technologies.
(First published in The Australian Financial Review, Sep 17th 2012)