Private equity is looking for small cap sized deals
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Australian private equity firms are looking hard at small, high-growth targets but as the ASX surges past 7,000 and the tech sector becomes more and more expensive, they are heading private.
Mergermarket Australia bureau chief Maggie Lu says the valuation of the public market is going up, deterring potential private equity buyers looking for a good price range.
“Of course they’re looking, but it’s not an ideal time,” she said.
Mergermarket’s 2019 M&A trend report noted that Australian private equity firms had started to pivot to the mid-market targets.
These are deals between $20m and $200m.
Lu says major private equity player CPE Capital, formerly CHAMP, is looking for equity investments of $50m-$100m in companies ideally with EBITDA of more than $10m and an enterprise value of $100m-$500m.
“Instead of chasing large deals, some of Australia’s most established PE firms such as CPE Capital (formerly CHAMP) and Quadrant have begun to show preference for more innovative and higher-growth companies,” the report said.
Quadrant launched a growth fund last year, seeded with $400m, to invest in companies smaller than it has traditionally considered in a bid to find high growth and disruptive investments.
It is looking at consumer products, ecommerce, healthcare, education, B2B, and sectors involved in servicing aging populations.
It made four acquisitions in three months, last year, one of which was former public company Greys Online, a bargain at $60m as owner Eclipx (ASX:ECX) was desperate for a sale.
It also bought babywear company Love to Dream, online underwear company Modi Bodi, and online beauty merchant Adore Beauty.
CPE Capital told Mergermarket it was looking at the middle market in order to become more nimble and respond more quickly to opportunities in Australia.
It bought office design business Unispace and Adelaide business Levett Engineering, which Lu says has been growing at 40 per cent a year for the last three years.
Private equity began taking public companies private last year, but it wasn’t the flood many expected after the majors raised huge amounts of cash the year before.
Deals of this ilk that took place last year include Quadrant which is still in the process of buying QMS Media (ASX:QMS), Babcock & Brown infrastructure spin out Brookfield which bought Healthscope, and BGH Capital’s and AusSuper’s successful bid for listed education provider Navitas (ASX:NVT).