‘Dry powder’: Local private equity firms are cashed up, but their investment approach is changing
Private-i
Private-i
Like their global counterparts, Australian private equity firms have more money than ever — but they’re being a bit more select about how they spend it.
Recent data from the Australian Investment Council assets under management held by private capital funds has grown to $30 billion.
And according to Simon James, a partner at accounting and advisory firm HLB Mann Judd, they’ve also got around $11 billion of “dry powder”.
“That’s obviously of interest to me in the M&A space, because they’re a serious potential acquirer,” James told Stockhead.
But the investment style historically associated with the asset class — aggressive dealmaking, lots of leverage — is a thing of the past.
In its place is a more long-term approach, and increasing engagement with big investment partners such as super funds.
“PE has changed its focus a bit, it’s more on point in terms of pricing — rather than just buy up, gear up and flip on.”
“That broader strategic aspect of the deal is more important, which means they’re spending more time and being more picky about what transactions they go with.”
That doesn’t mean markets shouldn’t still be on the lookout for some big deals in the space, such as the recent $2.3 billion deal for education provider Navitas by BGH Capital.
“Don’t forget that PE is a business – they make money by deploying capital and doing something with it,” James noted.
“So if we’ve got $11b of dry powder sitting there, that’s $11b worth of undrawn funds that have not been worked and are not making a return.”
Having recently returned from an Asia-Pacific conference in Silicon Valley, James also provided some analysis of the Australian market in the context of global trends.
He highlighted that an increasing number of US companies have been listing publicly with a market capitalisation of more than $US1 billion — having spent years building value via private funding rounds.
In Australia’s capital markets, trade sales or ASX listings are still the main vehicles for exits or capital raisings, but James said rushing to the ASX doesn’t always pay off.
“If you look at the amount of companies on ASX, a number of them have no liquidity anyway.”
“There’s a lot of overhead costs but not necessarily liquidity, so you’ve got to balance up what the rationale is in the first place. In that case, private money’s probably better,” he said.
While Australian markets wait for the next big PE deal, James said he’s noticed an increasing amount of activity in the unlisted space.
“There is a building network, the problem is though that the size of the parcels is still small. Moving 500k to 1m of shares around, it’s hard to get interest — if you got $20m offers it’d be a different story.”
Looking ahead, James said domestic activity in the unlisted space may accelerate as the older generation scale back or sell their existing businesses.
“I think if you roll it forward five years there’ll be more big investments, as businesses change hands to younger generations or tech companies come through that are capital hungry and want to go harder,” he said.