Businesses are continuing to demonstrate strong appetite to sell to private equity, but getting a fair price is what really matters.
More businesses are open to private equity than ever before, according to KPMG's 2017 Evolving Deals Landscape survey. With 65 percent of sellers most interested in negotiating a fair price and 56 percent interested in finding the right buyer, there seems to be little concern about considering a Private Equity buyer. The survey also noted the next 3 years will see healthy activity, with 48 percent of board members or chairpersons thinking of merging with or acquiring a business over this timeframe.
Australian businesses are growing in maturity and familiarity with Private Equity funds in the Australian market, according to David Willis, National Sector Leader of Private Equity at KPMG Australia. “It’s been around for almost 20 years, so you get more and more people seeing it as a good option – especially with the amount of money in the Australian market,” he says. “The biggest challenge is finding enough deals.”
Australia isn’t very active in the leveraged buyout category, that are more famous in the US and Europe, Willis says. “Most deals here are in the mid-market area. Of the 10,000 SMEs in Australia, a significant number of those are owned by baby boomers who are working through succession planning and needing to sell on. ‘Unloved’ businesses are also catching the eye of Private Equity funds. These typically have a strong market position but need capital to grow to the next level.”
Another attraction of selling to Private Equity is that you can build the business out of the public eye. “There is a distinct lack of red tape compared to listed. Decision-making is faster and there is an alignment of interests in driving efficiencies and strategy rather than appeasing shareholders,” Willis says.
Around 45 percent of surveyed CEOs were positive about Private Equity compared to 21 percent of other respondents. Willis says one of the big attractions is that, “as long as there’s an appropriate investment plan and return on capital, Private Equity will support management to invest in areas that drive the business forward.”
Peter Turner, Partner in KPMG Australia’s Mergers & Acquisitions team adds that more people now understand that most Private Equity funds aim to facilitate a growth strategy rather than re-engineer a business. “The growing number of funds actively courting potential sellers is helping that process, too.”
There has also been a generational shift in the Private Equity sector with some older firms such as Catalyst, Ironbridge Capital, Wolseley and Equity Partners exiting the market with Odyssey Private Equity and Adamantem Capital amongst others entering the market, Turner explains. “This is a product of the industry’s growth cycle and has led to the amount of money in funds increasing rather than shrinking.”
Willis says that as most Private Equity funds have a 10-year life span, they look for 3 to 5 year timeframes for a return on their capital. “They will look at sectors and geographies with strong dynamics – such as health and aging, growing population, good consumer consumption and technological disruption. They want a business that is mature enough to invest in, and has a requirement for growth capital.”
The survey revealed that the sectors viewing Private Equity buy-in most positively are technology, financial, consumer retail and manufacturing. Willis pointed out that much of the retail sector is currently under stress, so private equity would be wary. “They would be looking for niche business either at the highest or lowest price point of the market with a 5-year investment turnaround. “Sectors with longer return timeframes, like transport, are at a disadvantage. Sectors with market growth potential, like financial services aimed at retirees, catch their eye.”
In Willis’ opinion, the most successful acquisitions have focused on buying a business to improve it. “In these cases, there is an unwavering focus on the investment thesis in growing and making the business better. It’s why I think private equity is getting better outcomes and returns than typical mergers.”
Quadrant Private Equity strategy around inbound Chinese tourism has seen the firm purchase The Ghan Railway, assets in the Whitsundays and Rottnest Island Ferries. Bain Capital invested heavily in Camp Australia, a before and after school care program, and Baring Private Equity took SAI Global private.
Marquee transactions over the last 12 months have been in healthcare, with cancer and cardiac specialists GenesisCare sold to China Resources and Quadrant Private Equity selling its oncology business, Icon Group to a consortium led by QIC and included Goldman Sachs Private Equity and China’s Pagoda Investment. Quadrant also sold its Canberra Data Centres business to Morrison & Co who are managing the investment on behalf of Infratil and Commonwealth Super. “The latter is a good example of a Private Equity fund investing in growth, then selling to a superannuation-funded business as it enters the infrastructure-style return phase,” Willis says.
Turner adds that these successful exits had clear strategies. “They were able to scale these businesses quickly and prepare them for further growth for the next buyers – in the case of Icon Group, this included expanding into the Chinese market.
“Swisse Vitamins started that trend with its sale to Hong Kong based Biostime, and Chinese consumer health is certainly going to be a huge growth area for some time to come.”
Changing attitudes towards fees are affecting the industry and not going away. “The typical ‘two-and-twenty’ fee model is being challenged in much the same way as it is in the superannuation sector,” Turner says. “It’s leaning towards investors slowly lowering the fees they are willing to pay or, at least, wanting to see more value for money in the fees they do pay.”
With so many Private Equity funds chasing the same types of deals, it can be hard to identify the right fit between the fund and the right business. Turner says KPMG’s Deal Advisory business can help identify well-structured businesses that are primed for growth over the appropriate period which match a particular fund’s strategy.
Our local and international brokering experience also means we can help educate businesses around the potential benefits of selling to Private Equity and help them work out a fair price. “There is a lot of dry powder out there,” says Willis. “The current challenge is finding the right businesses.”
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