What is Private Equity?
What is Private Equity?
Private equity is investment typically in unquoted companies that are considered to have high growth potential, with the aim of building and improving them over a period of years and then exiting the investment at a higher value.
The term 'private equity' is used here in its broadest sense to encompass both early-stage (venture capital) and later stage investments. Private equity investment is frequently categorised according to the stage of development of the company being invested in. Expansion and buy-out stage investments are often termed 'private equity' investment, whereas seed and early stage investments are termed 'venture capital' investment.
Benefiting Australian businesses and investors
- PE provides much-needed finance to small-to-medium businesses looking to expand, and to distressed companies looking for rescue financing.
- PE managers work actively with investee companies to improve operational performance. A study of Australian PE exits in 2007 found that: (i) enterprise value in these firms grew by a CAGR of 21%: almost double that of public company benchmarks; and (ii) EBITDA grew 2.5 times faster than public company benchmarks.1
- Benefits of PE allocations are largely returned to Australian retirees. Although only about 1% of Australian superannuation is invested in PE, domestic superannuation funds accounted for over half of PE drawdowns in FY08.
Productivity
- The labour productivity of private-equity backed firms increases at almost double the comparable national figure.2
- PE and VC are vital to the innovation framework and the technological enablers of Australia's future competitiveness. Nearly 3 times as many PE investee companies launched new products after PE ownership, compared to those who did so prior to the initial PE investment.3
- PE plays an important role in investing in and regenerating companies which would otherwise fail or stagnate. The majority of PE deals involve the acquisition of unwanted or non-core assets.
Australian PE & VC value proposition
- Australia is a major PE investment centre in the region. In 2008, Australia received the largest amount of PE investment of any country in the Asia-Pacific region, with over US$1.68 billion of deals reported that year.
- Australia has a well-developed financial services infrastructure for PE relative to other regional markets. Industry data availability, reporting standards and the tax and legal framework re generally reported to be among the most well developed in the region.
- Australia's accounts for a significant proportion of regional M&A activity. In 2008, Australia was the biggest market for M&As in the East Asian region. It accounted for 20% of total deal value for the region, followed by China (17%), HK (16.5%) and Japan (14%).
1 Source: Ernst and Young, How Do Private Equity Investors Create Value, 2008. Figures exclude two (positive) outliers.
2 Source: Meyrick and Associates, Labour Productivity Study, 2004.
3 Source: PricewaterhouseCoopers, Economic Impact of Private Equity and Venture Capital in Australia, 2006.