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News RoomAustralia punching above it's weight in PE7, July 2008 Australia's relatively tiny population of 20.6 million (0.3% of global population) often manages to contribute one to two percent of most figures in the economic world. The 2007 nominal Gross Domestic Product (GDP) was $908 billion US dollars, representing 1.7% of global output. The Australian Securities Exchange (ASX) contains 2.2% of the value of all the exchanges within World Federation of Exchanges (WFE). The constantly growing Australian Private Equity (PE) industry is no different. From 2003 to 2007 Australian PE raised over $22 billion USD, around 1.4% of funds raised globally during the period. Not surprisingly the United States completely dominates the fundraising statistics, raising nearly 69% of global funds during the five year span. Top 15 Global GDP Countries and their Private Equity Fund Raising
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Country |
Funds Raised
(USD mil) |
Per Person (USD) |
% of GDP – Nominal (2007) |
% of
Stock Exchange |
USA |
$1,068,487.80 |
$3,516.79 |
7.72% |
5.54% |
Japan |
$9,836.50 |
$77.28 |
0.22% |
0.21% |
Germany |
$13,282.00 |
$161.25 |
0.40% |
0.66% |
China |
$6,358.30 |
$4.78 |
0.20% |
0.20% |
UK |
$208,018.00 |
$3,413.27 |
7.50% |
5.85% |
France |
$49,427.90 |
$771.61 |
1.93% |
1.26% |
Italy |
$7,073.60 |
$121.65 |
0.34% |
0.73% |
Spain |
$4,835.60 |
$119.42 |
0.34% |
0.26% |
Canada |
$18,664.40 |
$561.97 |
1.30% |
0.89% |
Brazil |
$1,810.50 |
$9.43 |
0.14% |
0.11% |
Russia |
$5,472.10 |
$38.89 |
0.42% |
0.42% |
India |
$7,298.50 |
$6.36 |
0.66% |
0.29% |
South Korea |
$8,142.70 |
$165.39 |
0.85% |
0.81% |
Australia |
$22,083.00 |
$1,071.95 |
2.43% |
1.76% |
Mexico |
$172.00 |
$1.56 |
0.02% |
0.04% |
Average |
$95,397.53 |
$669.44 |
1.63% |
1.27% |
Source:
Thomson
VentureXpert, IMF, CIA World Fact Book, WFE, AVCALAs a percentage of GDP and the local public exchanges, the US and the UK clearly represent their more matured PE markets. Averaged over the five years Australian funds raised equate to only 0.49% of GDP per annum, well below the US and UK who both averaged over 1.5% per year. In terms of the Australian Securities Exchange (ASX) the past five years of fund raising equates to 1.76% of total exchange. Even taking into account a generous leveraging multiple (30% equity: 70% debt), this would give the entire industry the power to buy only 5.85% of the exchange, equal to the weight of the UK industry unlevered.
Source:
June 25, 2008
A report released by Watson Wyatt has indicated a significant growth of fund of funds alternative assets managed by investment managers on behalf of the largest 99 pension funds worldwide. According to the research, the majority (47%) of alternative assets are invested in North America, with 39% in Europe and 10% in Asia-Pacific.
The top 50 managers of Private Equity Fund of Funds managed over US$139 billion. The sector is very top heavy with the top 10 managers accounting for 74% of the sector. Only 5% of assets were invested in the Asia-Pacific, but this grew from 4% in the previous year.
Source:
16, June 2008
Impact on private equity transactions.
18, June 2008
Two bids have been made on publicly listed companies, toy distributor Funtastic (tk: FUN) by Archer Capital ($132 mil) and Bravura Solutions (tk: BVA), a supplier of administration and management applications ($272 mil) by Ironbridge. If either go through they will be the first public to private transactions bids since Coates Hire buyout led by Carlyle (tk: COA) back in January.
Ironbridge has also ventured into its first mining investment, with the purchase of three specialist drillers; Nudrill, Gorey & Cole and Sides, combined value of $200 million. There is indication from Ironbridge this may only be the start of the firm’s investment into the sector.
In the more traditional PE investment area of retail, Pacific Equity Partners added to its investment of A&R Whitcoulls with its purchase of Borders Australia. Borders US took around $95 million in cash to entirely exit its Australian business. The deal could be worth an additional $15 million if financial targets across the 30 stores.
By far the largest transaction of late was also done by Pacific Equity Partners; through it’s roughly $1 billion transaction of American Stock Transfer & Trust, a US Share registry. Combined with PEP’s Link Market Services, the two will join to be the largest independent share registry in the United States by issuer number.
Globally, Coller Capital has indicated more funds are likely to flow to the sector with over a third (38%) of Limited Partners (LPs) planning a higher allocation to Private Equity during the next 12 months. The report also highlights that LPs are expecting the best investments to come from the smaller end (less than US$1 billion) of the market during this timeframe.
Best types of private equity investment for GPs over the next 12 months – LP views
Area |
Overall Ranking |
Lower mid-market Buyout (<US$200m) |
1 |
Mid-market Buyouts ($U200m-$1bn) |
2 |
Growth/expansion cap |
3 |
Mezzanine |
4 |
Large Buyouts ($1bn-$5bn) |
5 |
Mega-buyouts (more than $5bn) |
6 |
Sources: Sources:18, June 2008
The combination of Commercial Ready Grants with VC funds has played an important role in the success of many Australian technology firms. Clearly, Venture Capital assists with the market inefficiencies of financing early stage entities and there is a need for programs such as Commercial Ready to close the funding gap.
Since the start of Commercial Ready, 50 of the 454 grants were backed by Venture Capitalists, receiving $79 million in funding, representing 11.0% of the grants by number and 17.8% by funding. The loss of around $200 million each year in grant funding flowing to Australia's small and medium sized enterprises to support innovation and commercialisation will have significant repercussions for Australia's economy.
It should be noted that the predecessors upon which Commercial Ready was based, (AIRDIS, GIRD & START), which have been around in one form or other for 30 years, were very successful Labor Government initiatives.
Given that the Innovation Review is still months away from reporting their findings this was seen to be a surprising action by the Government. From our understanding, the rationale for the cut comes from a 2007 productivity report which indicates that, “There is robust evidence indicating that the Commercial Ready program supports too many projects that would have proceeded without public funding assistance.” Our view is that early stage, high risk, high growth enterprises have not been distinguished from larger firms which are accused of receiving “industry welfare".
The impact of this cut will have an effect immediately to small companies and venture capital firms, but the impact on innovation won’t be seen for some time. Enterprises which had applications into but not completed by Commercial Ready will not receive funding, potentially crashing or significantly hampering the existence of the company. Companies which are looking to seek capital funding will now find it hard to do so. Funds which are mid fund raising will find it difficult to raise funds offshore as the effective cost of capital has risen to early stage Australian, given the significant reduction of government grants. Investment in early stage Australian companies will significantly slow as business is forced to operate in a new environment.
The cuts of the program over 4 years total $707 million, a significant portion of which is to be spent on establishing Enterprise Connect Innovation Centres ($251 m) to provide services to SMEs to boost productivity. This service is incredibly similar to the established Innovation Exchange, and does not offset the features that are taken away by the removal of Commercial Ready.
AVCAL Action
AVCAL has collaborated with many early stage members and other industry associations (AusBiotech and Research Australia ) to write a second submission to the Innovation Review. The submission highlighted both the immediate effects of the cut as well as the long term impacts on the Australian economy. We urge our members and their portfolio companies to continue to write to the federal politicians to express their disappointment at the axing of the program.
14, June 2008
Purchases and exits within the market dramatically declined as credit became too expensive and the equity markets became an unreliable method of selling assets. Meanwhile, fund raising continued throughout the year, slowing sometime after the rest of the market slowdown.
As at June 2007, funds under management (FUM) in the Australian Private Equity industry were at A$22.3 billion. Buyout funds continue to dominate the Australian market, represented through the top 20 funds (FUM ~A$15 billion) which are buyout or fund of funds. Venture capital has remained at around 10% (A$2.4 billion) of the total market and has had some recent growth as a handful of VC firms have grown to exceed A$300 FUM.
Fundraising continued
While the private equity deals and exits have slowed to a crawl,
the fund raising aspect has continued to grow and remain active. According
to Thomson Financial, fund raising in Australia led the way for the Asia-Pacific
region nearly doubling over the year to US$5.8 billion (up from US$3 billion
in 2006), representing 38% of all funds raised in the region.
Amongst the market turmoil, Super funds remained quite optimistic to private equity investment. A recent study by John Evans, associate professor at the University of New South Wales has shown Australian superannuation funds have increased their commitment to private equity investment from 4.5% (2005) to 6% (2008). Additionally, Australia's sovereign wealth fund, the $60 billion Future Fund, has indicated its intention to get involved in the sector, both domestically and internationally.
The access to even a small proportion of the A$1.2 trillion worth of superannuation has enabled the domestic industry to form and grow at a substantial rate. Increased recognition as an asset class will continue to stimulate this growth. Smaller funds are increasingly being attracted to the asset class with the growth of fund of funds, enabling a diversified investment to the industry.
Mid Market keeping the industry going
The mega deals have completely disappeared from the market, with
only two deals exceeding US$1 billion for the year. According to AVCJ research,
Private Equity as a percentage of M&A declined over 2007 to 12.7%, from
highs of 19.9% in 2006. However at the same time there was a growth of Australian
M&A within the Asian region. Australia represented 23.2% of M&A transactions
during 2007, up from 22.4% during 2006.
Representing a large bulk of the deals during 2007, 20 transactions took place with a market value of US$100-US$1billion. At least seven of the deals reported that the Private Equity house took a stake below 100%, five taking place after July. Within the 20 transactions, 11 took place before July and represented 60% of the value from the group.
The 40% that occurred after July had an average transaction value of US$250 million down from US$307 million for transactions that had taken place earlier in the year. While this indicated the preference for smaller deals as the listed markets slowed down, the fact that nine deals took place with a market value of $2.25 billion indicated the market has come to a halt.
Trade Sales Dominate
With all the fluctuations in the listed markets it is not surprising
to see a massive increase in trade sales for Private Equity exits. From AVCJ
statistics, trade sales accounted for nearly US$6 billion in exits over 2007.
These exits were clearly larger than those using the IPO route; with two
exits exceeding US$1 billion (DCA group and Cleanaway). The top ten trade
sale exits accounted for US$5 billion.
In line with the volatility of the listed markets, Private Equity and Venture backed Initial Public Offerings (IPOs) significantly declined. Only 10 listings took place worth a combined value of US$505 million; nearly half of which was from one listing.
The Year Ahead
While the state of the market is commonly viewed through deal activity,
the industry’s access to cash will have considerable impact in the
future months. Significant fund raising throughout 2007 combined with an
estimated 40% in unused commitments has left many funds with cash to spend.
The mid-market buyouts have already demonstrated the trend towards smaller transactions with Private Equity houses taking smaller (<100%) stakes. Globally trends have seen firms alter their deals with increased syndication, use of mezzanine debt and putting extra levels of equity into deals. Newly formed funds along with the unused commitments of existing funds will consider a combination of these options as uncertainty remains in the marketplace. Nevertheless, Private Equity houses are already reporting an increased level in acquisition activity. An interesting year is ahead, given the low price of equity matched with the constrained access to and high cost of debt.
Sources:
5, June 2008
A report by Global Insight, has stated that Sovereign Wealth Funds (SWFs) have grown at a rate of 24% annually for the past three years. If this rate continues, SWFs will exceed the economic output of the United States by 2015. More than 30 countries now have SWFs, with the Nigeria’s fund growing at the fastest rate, followed by Oman and Kazakhstan.
The large amounts of cash available to SWFs have allowed them to play a major role in stabilising the global credit markets through their investments, which have seen over US$80 billion injected into major American investment banks. Additionally SWFs have continued to place funds into private equity, accounting for around 10% of investments globally. To the broader M&A sector, during January there were US$60 billion in global M&A transactions, approximately one-third of this was backed by direct and indirect SWF investment. This was inline with 35% of M&A transactions during 2007 being funded by SWFs.
The criticisms of SWFs are very similar to that of private equity in recent years, focused on lack of transparency and disclosure. Australia’s own Future Fund has been criticised for both of these reasons. However SWFs, raise an additional concern when they invest across boarders. While it is clear the purpose of a buyout firm is financial gain, concern has risen that SWFs have other ulterior motives in their investments.
In response to this Australia established six principles that will be looked at when a SWF investment takes place. (See AVCAL article ‘Sovereign funds cashed up and spending’ AVCAL article) Likewise the US treasury has established principles with Singapore and Abu Dhabi for their SWFs to adhere to when investing. The basis is that they are investing on a commercial basis, with strong governance structures and offer compliance with host country regulation. In return the US will not put up any protectionist barriers.
Sources:
According to the survey conducted by John Evans, associate professor at the University of New South Wales, Australian superannuation funds have increased their commitment to private equity investment from 4.5 percent (2005) to 6 percent (2008). The survey sponsored by private equity fund manager, Adveq Management covered more than 40 Australian Superannuation funds, with $250 billion in funds under management.
Amongst the market turmoil, Super funds remained quite optimistic on private equity investments. As in the 2005 survey, diversification was seen as the main objective behind private equity investment. While, there was a major increase in the use of fund-of-fund structures (50% to 75%), there was a significant fall in the allocation to Australian private equity (74% to 46%).
This came as the nominal return expectations fell 4.9 percent to 11.6 percent. The expectation gave a 3.4 percent premium to listed equity, a valuation stated to be more reasonable and steady, after years which saw some returns above 30 percent.
Australia’s sovereign wealth fund, the $60 billion Future Fund, has indicated its intention to get involved in the sector, both domestically and internationally. The general manager of the fund, Paul Costello, stated that they were looking at how the liquid fund could participate at a time when the market is running dry of cash.
As at the end of January, the Future Fund held nearly 75 percent of its $50 billion in cash. The fund’s equity allocation has about one-third in the domestic market and two-thirds overseas. Additionally the fund has a 16.5 percent holding in Telstra, received from the Government sale in November 2006 which is worth around $9 billion. Sales in the Telstra holdings are restricted until the end of 2008.
Costello stated the fund’s private markets team will focus on opportunities globally across infrastructure, private equity and real estate investments.
Sources:
April 23, 2008
Audinate Pty Ltd, a company revolutionizing digital media networking technology,
announced today that it has raised A$4 million in its second investment round,
led by Innovation Capital with follow-on investment by Starfish Ventures and
NICTA.
The company will use the funds to continue developing and marketing its products
to the international professional A/V industry, with specific emphasis on the
United States.
Audinate was founded in late 2006 as a spin out company from NICTA, Australia’s
Information and Communications Technology (ICT) Research Centre of Excellence.
Starfish Ventures, NICTA and Audinate’s founders led the seed-fund investment
round to enable the company to market its patented Dante™ technology,
which allows time critical digital media to be transported using standard
Ethernet and TCP/IP networking protocols, without compromising performance
or introducing unacceptable delays.
Prior to Dante becoming available, there has been limited adoption of digital
networking solutions in the professional and installed audio markets due
to long latency or delay and poor synchronization between audio and video
output devices. Audinate has solved these problems with patented technology
in two areas; Dante™ technology
covers methods for tightly synchronizing the clocks that control analogue to
digital conversions on a multi-use network while keeping transmission latency
to a minimum. Incorporated within Dante is Zen™ which extends the benefits
of Zero configuration and self discovery networking to media networks.
The company has enjoyed substantial progress over the first two years of
operation, particularly in the US market. “Since the launch of the company almost
two years ago the interest in our Dante networking technology across the audiovisual
industry has exceeded our expectations. In the US market we have agreements with
several major manufacturers, and interest in Europe is also growing strongly.
Products incorporating Dante have been launched by Dolby and Lab.gruppen and
others are in the pipeline,” said David Myers, CEO of Audinate.
Audinate’s strong progress and developing traction in the US market
was a key factor in successfully securing $4 million in second round investment,
which provides it with the necessary capital to continue its growth.
“The pedigree and calibre of the underlying technology developed by Audinate
is clear and we are delighted to be able to support a strong entrepreneurial
team as it seeks to play a major role in revolutionising the A/V equipment industry,” said
Roger Price, General Partner at Innovation Capital.
“Starfish is pleased that Audinate has been able to develop the market
as planned with its initial funding,” said Investment Principal Michael
Panaccio, “we are confident that Audinate will become an industry standard
and are delighted to further support its growth.”
“The experience and expertise provided by our investors will benefit our
continued efforts to develop and market our products both in Australia and overseas,” said
David Myers, CEO of Audinate, “we look forward to another successful
year.”
About Audinate
Audinate's pioneering Dante™ technology builds on Ethernet and Internet
Protocol Standards to make digital media networking easy, intuitive, cost-effective
and error-free. Audinate™ delivers industry-beating low latency and
synchronization technology to the Professional A/V industry. www.audinate.com
About NICTA
National ICT Australia Limited (NICTA) is a national research institute with
a charter to build Australia’s pre-eminent Centre of Excellence for
information and communications technology (ICT). NICTA is building capabilities
in ICT research, research training and commercialisation in the ICT sector
for the generation of national benefit.
National ICT Australia is funded by the Australian Government as represented
by the Department of Broadband, Communications and the Digital Economy and the
Australian Research Council through the ICT Centre of Excellence program.
NICTA was established and is supported by its members: The Australian Capital
Territory Government; The Australian National University; NSW Department of State
and Regional Development; and The University of New South Wales. NICTA is also
supported by its partners: the University of Sydney; University of Melbourne;
the Victorian Government; the Queensland Government; Griffith University; Queensland
University of Technology; and The University of Queensland. www.nicta.com.au
About Starfish Ventures
Established in 2001, Starfish Ventures is an Australian owned venture capital
fund manager seeking superior returns through active investment in innovative
technology companies. Starfish Ventures has over $350 million in funds under
management and has made investments in over 30 companies to date. Starfish Ventures
seeks investments in emerging Australian businesses across all technologies sectors
including information and communications technology, biotechnology and life sciences,
industrial technology, material sciences and cleantech. For more information
go to www.starfishvc.com
About Innovation Capital
Innovation Capital is an Australian venture capital firm that invests in physical
and life science ventures. It provides finance and commercial expertise to assist
Australian entrepreneurs build world class technology companies. It has offices
in Australia and the United States. www.innovationcapital.net
According to Thomson Financial, private equity deals globally reached a four year low of US$43.5 bn for the first quarter of 2008, down 77 percent compared to the first quarter of 2007. Against the preceding quarter (4th quarter 2007) this was a 47 percent drop where there was US$82.6 billion of activity. Some have indicated this is the end of the latest ‘era’ of private equity, which had seen six years of continuous growth, peaking in the second quarter of 2007 with nearly US$364 billion of deals completed. On a wider scale the global credit crunch affected all merger and acquisition activity, which fell to US$693 billion down 22 percent for the quarter compared to the previous time last year.
The global decline of the M&A market has been felt more in the US given that private equity accounts for a higher proportion of M&A than in other markets such as Europe. Current conditions have favoured corporate buyers with solid balance sheets, given their ability to raise debt, as well as the additional option to fund takeovers with stock.
Australian activity has fallen 30% in announced M&A during the first three months of 2008. The deal volume also decreased to 561 transactions, compared to 719 in the year before.
Sources:
Pacific Equity Partners (PEP) has finalised its fourth fund, PEP Fund IV, raising A$4 billion which was reported to be heavily oversubscribed. It becomes the largest buyout fund raised in Australia, eclipsing the A$1.36 billion raised by Archer in June 2007.The fund will invest in companies that run their main operations from Australia or New Zealand and have a minimum enterprise value of at least A$300 million. The size of the fund gives it a considerable advantage, as one of PEP’s founders Rickard Gardell stated, “In the current environment, a fund of this size is necessary to address deals much above A$300 million in size.”
PEP was established in 1998 and has since made 18 portfolio company acquisitions and over 20 add-on acquisitions. Currently the firm has investments in 13 companies with combined revenue in excess of $3 billion per annum.
Sources:
Results released by Dow Jones VentureSource have shown that globally venture capitalists invested a record US$3 billion into 221 deals throughout 2007, a 41% increase over 2006 investment. The results are inline with data released at the end of November by Thomson Financial and the National Venture Capital Association (NVCA) showing that U.S. venture firms spent nearly $2.6 billion in the sector within the first nine months of the year. According to VentureSource the U.S. was responsible for 83% of the investment throughout the year, accounting for eight percent of the country’s total venture capital investment. Within Europe, VC cleantech investment increased 27% to $360m led by the Nordic region, Spain and Germany.
For the year ahead, cleantech is expected to remain at the forefront of global VC investment. A survey released in December by the NVCA showed cleantech is expected to be the highest expected growth industry. Approximately 80% of respondents expected higher levels of financing to the sector throughout 2008.
Managing direct of Cascadia Capital, Ted Bernhard stated that a recession may actually boost activity within the cleantech sector, given potential economic benefits to a wide range of companies. For 2008, the sectors within cleantech expected to receive significant funding include; solar, advanced materials for energy efficiency and improvements for biofuels.
Within Australia, clean technology is growing but further support is needed from the government. Australian cleantech companies have found it hard to raise money, especially given the current state of the market. However, incentives such as the proposed $417 million Australian Water Resources Information System are expected to stimulate specific parts of the industry.
Sources:
One of the world’s largest private equity funds, Blackstone Group, has stated its intention to go directly to lenders to finance future leveraged buyouts. Targeted sources include; hedge funds, sovereign wealth funds and smaller banks which haven’t been as affected by the credit crisis. The demand for debt securities backed by LBOs reduced significantly in August along with the collapse of the U.S. subprime mortgages.
As a result, the banks have been left with approximately US$230 billion of debt to clear off their balance sheets. JPMorgan has decided to keep US$4.9 billion of leverage loans, changing their classification from “held for sale” to “held to maturity”. The bank still has a further US$21.4 billion of loans still classified for sale, indicating the intention to syndicate them. Major PE firms have already started to go directly to hedge funds for their debt financing. Debt providers for Hellman & Friedman’s purchase of Goodman Global (~US$1.8 billion) included fund manager Farallon Capital Management and hedge fund manager GSO Capital Partners.
The threat to bypass the banks poses significant potential losses to the investment banking industry. According to Freeman & Co. and Thomson Financial, JPMorgan alone earned US$412 million through arranging loans for US buyouts during 2007. This was more than twice the amount JPMorgan received in advisory fees. Banks have retaliated, stating that private equity firms will be entering into a market where they have less knowledge, fewer structuring skills, smaller distribution networks and taking on the “storage” risk associated with financing deals.
Sources:
Starfish Ventures is in the process of creating Australia’s largest early stage venture fund of A$250 million. The Melbourne based venture capital firm already has commitments of $150 million for the new fund, Starfish Technology Fund II which will be targeted at clean-tech, information technology/communications and life sciences.
Starfish expects to raise around 95 percent of the fund from domestic institutional
investors. A small proportion will be raised from offshore, with the firm
paying interest to Asian funds.
Additionally, Technology Venture Partners from Sydney is considering raising
its first fund since 2001, with a target of $100 to $200million of new capital.
Sources:
According to the new bi-annual figures released by Thomson Financial during
2007, Australia was the most active fundraising nation and had the third
highest level of investment within the private equity sector for the Asia
Pacific region
Australia’s fundraising of nearly $US5.8 billion represented 38 percent
of all funds raised in the region. Three of the largest new funds in the region
came from Australia including: Affinity Asia Pacific Fund III, Archer Capital
Fund 4 and Pacific Equity Partners (PEP) Fund IV.
| Full Year 2007 Asia Pacific Fund Raising by Nation | ||
Nation |
No. of Funds |
Sum Raised (US$m) |
Australia |
11 |
5790.3 |
China |
18 |
3406.9 |
Hong Kong |
11 |
2166.3 |
India |
18 |
1702.9 |
Singapore |
5 |
993.0 |
New Zealand |
3 |
425.5 |
South Korea |
11 |
324.4 |
Malaysia |
2 |
284.8 |
Pakistan |
1 |
88.0 |
Vietnam |
1 |
25.0 |
Total |
81 |
15207.1 |
Source: Thomson
Financial Year End 2007: Asia Pacific Private Equity ReviewOver 17 percent of deals in the region took place in Australia. Buyout stages dominated the investments made across the region, accounting for nearly 31 percent of all investments. The buyout of Consolidated Media Holdings (CMH) ranked in the top five deals for the Asia Pacific region.
FY 2007 Asia Pacific Private Equity Investments (Top 5 Countries) |
||
Nation |
Deals |
Sum Invested (US$m) |
India |
242 |
3386.8 |
China |
254 |
3010.0 |
Australia |
139 |
1276.3 |
Hong Kong |
16 |
1044.3 |
New Zealand |
27 |
259.7 |
Source: Thomson
Financial Year End 2007: Asia Pacific Private Equity Review
Southern Cross Venture Partners have established a new office in Palo Alto, California. The new office for the Sydney-based early stage VC firm will be led by Southern Cross co-founder and managing director John Scull. Mr. Scull co-founded Southern Cross with Bob Christiansen in 2006. Mr. Scull will be joined in California by Australian entrepreneur Dr Larry Marshall.
Southern Cross closed its first fund, $170m (USD$150m) in mid-2007, focusing on software and hardware, telecom, semiconductors, digital media and internet applications, advanced materials, nanotechnology and cleantech investments. Southern Cross has already made investments in four Australian companies: Xerocoat, Mantara, M&MD, and UIactive.
The US office intends to strengthen connections with US venture funds, assisting Australian and New Zealand based start-ups through their growth cycle, allowing them to receive further venture funding and exit in an international market.
Mr. Scull stated that Australia and New Zealand are 15-20 years behind the United States in terms of the maturity of the venture capital industry. The relationship is very similar to that of America and Israel, where Israel start-ups often venture to the U.S. to receive capital and the prospect of U.S. exits.
Sources:
Sovereign Wealth Funds (SWFs) in the gulf region, are cashed up and impacting the financial marketplace like never before. The SWFs in the six gulf states of Abu Dhabi, Dubai, Kuwait, Oman, Qatar and Saudi Arabia, account for nearly half of the sector through their estimated control of US$1.7 trillion. This staggering amount is roughly equal to the size of all the hedge funds in the world and easily accedes the roughly US$1 trillion in private equity funds.
Morgan Stanley research has estimated that funds are expected to rise by $400 billion annually for the next several years. Their recent investment in US investment banks, private equity houses and private equity deals suggests changing times ahead for the global financial industry.
Generally, SWFs are funds derived from the reserves of a country, which are placed aside for investment purposes to benefit the nation. Usually, they are made up of a combination of; stocks, property and other financial instruments. Worldwide it is estimated they control in excess of US$3 trillion in assets. Australia’s Future Fund is an example of a (rather small) SWF.
During 2007, it is estimated that the gulf funds brought in about US$180 billion in profit. Meanwhile their traditional source of income, through oil and gas generated $315 billion in revenue.
Gulf SWFs continued in their quest for international acquisition, according to Zephyr, they spent $83 billion buying foreign companies through 173 corporate transactions. The actual level is expected to be much higher due to the undisclosed nature of a further 108 cross border deals.
While $83 billion is just 1.7 percent of global M&A according to Dealogic, the influence of gulf is growing rapidly as they move to deals with the US Investment banks and private equity institutions. Gulf funds are becoming interested in LBOs, both alongside PE firms and sometimes by themselves, despite lack of experience.
The funds are building up for the so called ‘post-oil’ era. High oil prices in the foreseeable future are expected to keep the SWFs investing abroad with their surplus funds. The expected push is expected to see a sharp increase in acquisitions in Asia and other emerging markets such as Brazil, Russia, China, India and Latin America.
In September 2007, the Abu Dhabi fund bought 7.5% of Carlyle private equity, adding to other SWFs buying large portions of Citigroup, UBS, Bear Stearns, Morgan Stanley and Merrill Lynch. This is seen as a very different investment strategy to when majority of oil profits were invested in the ultra conservative investments of US Treasury Bonds.
There have been concerns in the United States with the investments of sovereign wealth funds into large financial institutions. The first rounds of investments were welcomed as a source of liquidity, the second wave of injections have been scrutinised by the US government. Some “outrage” has been controlled by the banks refusal to sell anymore than 12 per cent stakes in their businesses. In the past few weeks, SWFs have invested in excess of $35 billion in the major US investment banks.
The Rudd government has indicated that SWFs will be subject to greater scrutiny due to the concern some investments may be against the national interest. Treasurer, Wayne Swan stated six ‘principles’ would be applied when approving such transactions in addition to the final approval from the Foreign Investment Review Board (FIRB).
Australian Government Guidelines (Source: Treasury Press Release)
1. An investor’s operations are independent from the relevant foreign
government
2. An investor is subject to and adhere to the law and observes common
standards of business behaviour
3.An investment may hinder competition or lead to undue concentration or
control in the industry or sectors concerned
4. An investment may impact on Australian Government revenue or other polices
5. An investment may impact on Australia’s nation security
6. An investment may impact on the operations and directions of Australian
business, as well as its contribution to the Australian economy and broader
community.
Sources:
Statistics released this week from the National Venture Capital Association
(NVCA) and Thomson Financial show that VC fund raising in the United States
have reached their highest level since 2001. During 2007, 235 venture capital
firms raised in excess of $34.7 billion. This was divided across the range
of VC investment, early stage funds raised $9.7 bn, balanced stage $10.6
bn, later stage $7.2 bn and expansion funds raised $4.8 bn. The three largest
funds created over the year included:
* Technology Crossover Ventures VII, L.P. (later stage; $3.0 billion)
* Bessemer Venture Partners VII, L.P. (balanced stage, $1.3 billion)
* Vector Capital IV, L.P. (expansion stage; $1.2 billion)
(*Amounts in $USD)
Source: National Venture Capital Association and Thomson
Financial
The venture capital sector has not been so cashed up since 2001. Excess cash
at the end of the ‘tech bubble’ resulted in negative IRRs and capital
being returned to investors. There is expectation that excess cash from the
past few years of fund raising, alongside the predicted economic slowdown may
cause a rough time for VC firms in the US.
Sources:
It is well known that the credit crisis is causing buyout firms to go after considerably smaller deals with significantly less leverage. According to Thomson Financial, Bain Capital’s deal last week to buy Bright Horizons Family Solutions for US$1.3 billion is the biggest private equity deal to occur in the United States for nearly three months. During the boom times of the last two years, investment banks in the US took home more than US$30 billion in fees associated with private equity deals. However the deals are set for a period of change as investment banks are looking to reduce exposure to the industry as they become increasingly concerned about the level of risk associated with the asset class.
For the Bright Horizons deal, Bain is paying $640 million in cash, the rest in debt provided by Goldman Sachs which advised Bright Horizons. The leverage of nearly 50 percent is far from the levels 70 percent seen less than twelve months ago.
Additionally deal documents are set to change, with increased protections for all parties involved. Banks in particular are calling for “outs” to become standard, allowing them to back out of deals without penalty. This was considered common before the 2005 leveraging boom.
The current environment is expected to continue to increase pressure on buyout firms through; increasing cash levels, reducing their use of debt and diminishing expected returns.
Sources:
While investing in the clean energy sector has become common to both venture capital an private equity investments in the past few years, 2008 could see the industry’s further expansion into environmental investments through trading in carbon credits. This has already taken place in China and India, where funds invest in a project and take the carbon credits to sell into an established carbon market. Companies captured within this can include; those with technology to reduce emissions, highly inefficient corporations and those which can reduce their carbon emission.
Funds could see the potential credits as under valued, or combine assets to gain an excess value through the sale of the credits. A new financial definition has been coined within carbon trading, CAAV, carbon adjusted asset value. The previous Liberal government had set 2012 as a date for Australia’s emission trading scheme to start. However the new Labor party has indicated they would like to see the scheme established as early as 2010.
Sources:
Late last year the US Senate rejected a US$50 billion tax increase to the managers of hedge funds and private equity firms. While the issue is gone for now, it is an issue that is expected to return in 2008 as the US government looks to offset the cost of removing the Alternative Minimum Tax (AMT).
Ahead of this, senior officials from the Oregon Public Employees Retirement System ($65bn FUM) and the California State Teachers’ Retirement System ($170bn FUM) stated to the Financial Times they would oppose private equity firms attempting to offset a potential tax increase through increasing costs to investors.
The two retirement funds are amongst the biggest investors to private equity in the United States, and could cause other funds to follow. The response comes from private equity executives telling the government that a tax raise from 15 to 35 percent would be passed on to investors through higher fees.
Investors in US private equity funds, face similar fees to that in Australia, with a fee of 2 percent of funds under management and 20 percent of profits above a set hurdle rate.
Sources:
The first half of 2007 saw private equity take off, as massive deals became common. In July alone, private equity deals in the United States exceeded US$64 billion. For the remaining months of 2007 deals, dropped to a monthly total below $US8 billion. The “mega deals” virtually disappeared from the market; no deals above US$10 billion were announced after July. For the first half of 2007, the average deal size for transactions over US$1 billion was US$4.2 billion. After July this was halved to US$2.1 billion. Through this time middle market transactions have survived. With the large end of the private equity spectrum getting hit by the “credit crisis”, characteristics of the middle market have allowed it to survive.
Middle market deals tend to have a smaller percentage of debt financing around six times EBITDA as opposed to eight times EBITDA for larger deals. The trends within the market are for firms to use new tactics, more syndicated deals, use of mezzanine debt and putting extra levels of equity into deals.
It has been stated that the US buyout market is exhausted and the big cashed up private equity firms will look to move into new places such as China, India, Brazil, the Middle East and South Africa. Already, deals and funds are forming in less ‘traditional’ areas. In Turkey, KKR spent US$1.3 billion on a shipping group, while Actera Group set up the largest buyout fund through raising US$475 million. UK based Aureos, is currently raising Central Asia’s first buyout fund, looking to invest in countries such as Kazakhstan. The biannual barometer of LP investment, by Coller Capital stated that the proportion of LPs with exposure to emerging market private equity has grown from 24 to 40 percent within two years.
A major difference within emerging market corporations is that owners of the companies dealing with private equity are commonly not short of capital or looking to cash out. Their objective of attracting ‘western’ investors is to gain their expertise and assist with the expansion of the company. Therefore these deals tend to take have a more venture capital structure, with minority investment leveraged with little or no debt.
Sources:
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