AVCAL discusses private equity with various media outlets
11th Jan 12
AVCAL CEO Katherine Woodthorpe has given interviews and background to various media outlets focussing on a number of private equity deals currently in play. Here is a selection.
Listen to the extended interview on the World Today
Read the repurposed "print" story on the ABC News website
Australian Financial Review
Private equity marks its return
PRINT EDITION: 10 Jan 2012
By Anthony Macdonald
Private equity managers are often contrarians: a favourite catch-cry is that the best investments are often made when everything else in the market looks grim. It's at these times - when the equity values of public companies are down, economic conditions tough, the fundraising environment bleak and equities investors at their wits' end - that private equity managers can score themselves a 10-bagger and enter industry folklore.
PE stalwarts say it was these sorts of market conditions in 2004 that helped Catalyst Investment Managers bank such a number on jeans retailer Just Group, just as equity markets were beginning a long bull run. That same year, CVC Asia Pacific and Catalyst returned 7.4 times their original equity investment on Pacific Brands. Both investments were realised inside three years. So might the recent private equity approaches to three unloved and underperforming public companies - Spotless, PaperlinX and Pacific Brands - signal another run for private equity? While all three deals are in preliminary stages, the approaches show buyers are lurking for cheap targets - and biting at carrots laid down by bankers over the past few months. The bids suggest bets are being placed that the market is bottoming out, and unloved companies can be turned around.
Spotting poor equity market performance, frustrated shareholders and the economic uncertainty, bankers have been shopping these, and other potential turnaround stories, to PE managers, knowing they are deep value investors at heart. Their mission is to buy low, improve a business, and sell for a profit, usually inside a five-year time frame. If it's done at the right time of the cycle, the potential for impressive returns is maximised. "Pricing on new investments is pretty favourable. We're expecting a lot of new activity this year," a local PE firm partner told Financial Review DealBook on Tuesday. "We're looking for unloved names that don't get a lot of following. With a new management team, and a PE approach, you can improve the performance of the business pretty quickly."
Not surprisingly, data shows investments made at the bottom of the cycle and sold into a rising market will achieve the best returns. 2003 was the best year for Australian PE investments, according to data prepared for DealBook by the Australian Private Equity and Venture Capital Association (AVCAL). The 14 initial investments made in 2003 returned an average 82.3 per cent on exit. The assets were bought before the bull run started in 2004, and sold into the rising markets leading into 2008 (when the S&P/ASX 200
peaked at close to 7000 points), allowing the PE owners to benefit from price to earnings multiple expansion. They were helped by the M&A cycle also peaking in 2007, which ensured competition for PE exits and hype around sales processes.
INSTITUTIONS OF THE UNLOVED LOOK TO CASH OUT
As Spotless has shown, boards can be reluctant to engage with PE suitors, given the often highly conditional nature of bids. Spotless's management also had turnaround plans of its own to enact. A bid from PE must ultimately win over the target company's shareholders, some of who would have watched the value of their shares drop markedly under the current management. There is a growing feeling among bankers that investors are willing to support PE bids in the current market, where returns are hard to come by. Some of Spotless's investors, including Orbis Investment Management and Investors Mutual, have already thrown their support behind Pacific Equity Partners' $2.68 a share bid.
For fund managers, the question is whether the target company can realistically achieve sharemarket gains of 30 per cent or more - an average takeover premium which fund managers can bank if they sell into an offer - under its current management. More often, bankers say they are finding the answer to that question is no. "Institutional investors are less in love with some of these assets now," a senior banker told DealBook. "Throughout 2004 to 2008 with the PE failed bids for the likes of Orica and Qantas, there was always a shareholder blocking these proposals. I suspect now it is probably easier."
DEBT EASIER FOR LOW MULTIPLE TARGETS
Debt funding markets are also supportive of the right transactions. Recent transactions have seen PE funds invest about 50 per cent equity and borrowing the rest. According to Deutsche Bank analysis, recent deals have been done at about five-times debt to EBITDA (earnings before Private equity marks its return interest, taxes, depreciation and amortisation), including Bain Capital's $1.2 billion purchase of MYOB and Archer Capital's acquisition of fast food provider QSR. Leverage plays an important role in PE plans. It provides capital to otherwise constrained companies and can enable the manager to gets its turnaround plan on track.
PE managers say debt markets are challenging, but deals are still getting done. They say it's easier to secure finance when you are paying a low multiple for the business, which is another reason to focus on the underperformers. It's also interesting that PE funds are investing funds at a time when companies are sitting on record levels and cash and riding out the economic uncertainty. PE managers have a limited time horizon to invest their money and are trying to get in ahead of trade buyers. Industry logic says that a trade buyer should be able to out-bid PE players based on synergies it can create.
The PE fundraising cycle is also driving deal making. Australian PE firms raised a record $8.6 billion in the 2007 financial year, according to AVCAL. Most PE funds are raised with a 10-year time horizon, and fund managers generally look to invest over the first five years to provide sufficient time to manage an investment through to a profitable exit. Therefore, the funds raised in 2007 will be looking for a home this year. AVCAL estimates local firms have up to $7 billion of uninvested capital, while regional funds such Pacific Brands suitor Kohlberg Kravis Roberts & Co are also cashed up. But this dry power has been reduced by the challenging fundraising environment since 2007's record year: Australian PE funds raised in the four financial years since 2007 averaged $1.6 billion a year. For those seeking to invest, this has reduced some competition on deals.
Competition for assets has been a big issue for PE managers in the United States. When PE buyers are forced to go up against each other, they can end up paying too much for an asset, reducing overall returns.
The Australian Financial Review
Small is beautiful for price-conscious predators
By Jennifer Hewett, National Affairs correspondent
THE private equity bids for companies such as Pacific Brands and Spotless make it look as if private equity is back in a big way in Australia. The truth is it never really went away.
But what has changed is the size of the deals and the amount of leverage involved.
Forget the ambitious multi-billion-dollar mega deals, for example, that saw the big global players in private equity make ultimately unsuccessful bids for companies such as Coles and Qantas. Or the "successful" private equity forays on the Seven and Nine networks in 2006.
These were all in the glory days before the global financial crisis made everyone realise that there was indeed such a concept as too much debt and that asset prices didn't automatically keep rising. Now expectations tend to be more modest - along with the money involved.
It's not just that some of the big-bang debt deals of several years ago - such as CVC Asia Pacific's investment in the Nine Network - are still causing their private equity owners such grief. It is that everyone has had to become more cautious about what can go wrong and what is necessary to make the numbers add up.
Price, price, price. That is even more the case when the supply of money from Australian banks is neither as cheap nor plentiful, as it once was.
"Banks are not prepared to underwrite or hold as much as they used to in terms of quantum or leverage," one seasoned adviser says. "But it's still very possible to get debt from Asian and Aussie banks around the $1 billion mark."
And although it was certainly difficult to get funding for almost any deal for a couple of years after 2008, the private equity players also never stopped looking.
Many of those deals that did proceed were much smaller, involving either unlisted companies or lesser-known ones, so they didn't make much news. Others just never got past the starting line of the new commercial reality.
Another obvious supplier of capital, Australian superannuation funds, have been decreasing their exposure to private equity. In late 2009, the fruitless raid by the Australian Taxation Office's pursuit on (empty) TPG bank accounts in pursuit of tax it considered payable on TPG's profit on the float of Myer also complicated Australia's appeal.
But global players did start to restructure deals to avoid any potential problems with the ATO. And while many disgruntled Myer retail shareholders may still be furious at the price they paid in the float, the Myer deal was further evidence that Australia could still be a very good investment for private equity.
By late 2010, the $2.7bn Healthscope deal involving TPG and another global private equity group, Carlyle, signalled to everyone that the private equity market remained very much alive in Australia.
Even so, Katherine Woodthorpe, chief executive of the Australian Private Equity and Venture Capital Association, still says the perception that private equity "is back on the prowl in Australia is a little overcooked".
"There has been some increase in activity over the past 12 months in terms of funds invested," Woodthorpe says.
"But around 40 per cent of that (last financial year) was due to the Healthscope deal. The number of deals themselves actually reduced. And most are at the smaller end of the midrange market so they tend to be under the radar."
Not so, of course, with well-known names such as Pacific Brands and Spotless. And it does show that private equity remains in constant search mode for opportunities, including at least a few of the relatively larger deals.
Apart from anything else, private equity groups have a limited period of time - about four to five years - to invest the money they have raised in what are usually 10-year funds before they have to return the money with no result. It doesn't do their statistics or their appeal to investors or their returns any good for that to happen.
The general concept is that private equity can restructure a company, including injecting capital, and make it more efficient before exiting via a float or a trade sale within about five to seven years. This doesn't always work according to plan, especially if the share price falls post float.
Well before that stage, however, one of the problems right now is the differing views on value. Clearly, it can be a good time to buy when prices are relatively cheap and it turns out to be the bottom of the cycle. Although prices may have fallen and economic conditions may be so uncertain or downright miserable - as in Europe - many owners of public and private companies remain reluctant to sell at prices private equity is willing to pay.
In Australia, where economic growth has been stronger than much of the developed world, that mismatch of expectations is clearly in evidence. Many company boards firmly believe their fundamental value is stronger than their depressed share price indicates. Some of their institutional shareholders, dismayed by the outlook and more seduced by relative short-term returns, may be less patient. But given that private equity generally prefers to work with the imprimatur of the board rather than make a hostile bid, it can lead to a dead end.
So the hype about a new rash of major deals, especially in the retail sector, may remain largely just that.
The Pacific Equity Partners pursuit of Spotless, for example, has run into difficulties with the Spotless board refusing to engage until or unless PEP lifts its offer to at least $2.80. PEP said yesterday that the board had not provided it with any justification for increasing its bid.
The difference between valuing a company at $711 million and at $743m may not seem much but PEP has suffered through enough examples of deals going sour and its companies going into administration to make it determined not to overpay.
Similarly, the KKR interest in Pacific Brands is at a preliminary stage. It would like to produce a win after failing to get deals with Healthscope, Perpetual and Transpacific. But overpaying would be even worse.
For Pacific Brands, it would actually be a return to private equity after CVC and Catalyst floated it back in 2004, only for the company to be hit by increased competition and inability to grow as promised. In this case, KKR has a lot of global retail experience and global supply chains that could allow it to take some of the Australian brands international.
Will this work? KKR is clearly willing to bet more than $600m that it will.
Author: Adrian O’Shannessy, Director, Greenwoods & Herbert Smith Freehills
Author: Dr Kar Mei Tang, Head of Policy and Research, AVCAL