Carried Interest

AMP's Private Equity Team Jumps Ship

When it comes to captive private equity teams I'm at risk of sounding like a broken record.  Don't believe in them.  Don't believe they're sustainable.  In particular, I don't believe that captive teams which raise and invest third party money are sustainable.

This week AMP Private Equity (Australia's oldest captive) lost two of its senior staff.  Marcus Darville is heading over to Quadrant Private Equity.  His colleague Craig Cartner has been poached by Archer Capital to help launch a new mid-market fund.

Will AMP wave the private equity white flag?  I doubt it.  Big financial institutions are slow to learn and don't like accepting (very public) defeat.

Entries and Exits - Myer

A consortium led by Newbridge Capital has set a new deal size benchmark for Australian private equity by paying $1.40 billion for the Myer department store business including its flagship Melbourne building.

Myer is in the midst of a difficult turnaround and the execution risk kept local Australian private equity firms away from the auction.  In the end, three overseas bidders slugged it out and Newbridge paid a very full price for a business that some analysts were valuing at zero not long ago. 

Still, if any one can pull off this deal it's Newbridge and their American parent Texas Pacific.  Together they have led many of the world's largest retail buyouts including Neiman Marcus, Debenhams, J Crew and Bally.

Entries and Exits - Kids Campus

Investec Wentworth Private Equity has sold it's stake in listed child care group Kids Campus to industry giant ABC Learning Centres.  Investec acquired its equity just two years ago for about 40 cents/share, or approximately $12 million.  I hear they have more than doubled their money . . . not a bad result at all.

The Kids Campus investment was a classic example of a private equity PIPE transaction.  In addition to providing capital for operations, Investec also added value by raising a $25 million property trust which funded the building of new greenfield child care centres.

It's All About Access

In my last post I commented that getting "access" to the star funds in Australia is no longer easy.  The $1.2 billion fund raised by Pacific Equity Partners was reputedly three times over-subscribed.

Access is enormously important in private equity investing.  In public markets, investment returns are largely determined by asset allocation.  What really matters is whether you put your money into stocks, bonds, property or cash-- not which stock you choose or which fund manager.  In fact, over a decade, the spread between a top quartile bond fund's perfomance and a third quartile fund is only about 1%.  For shares the spread in returns rises to about 3%.

But get this, depending on which piece of research you accept, the spread between top quartile and third quartile private equity performance sits somewhere between 15% and 22%.  Massive.

Implication?  If you can't get your money into a top-performing private equity fund you're better off staying out of the asset class.  It's all about access.

Who Do I Rate?

I get a surprising number of emails from overseas investors who are considering allocating capital to Australian private equity and want to know more about the players in this market.  It got me thinking . . .  which firms would I trust with my own money? 

There have been some clear winners in the buyout and mid-market areas, and I'd be pretty confident putting my bank balance in the hands of any of the firms listed below (in fact, getting access to some of these funds is becoming a challenge for LPs).  Early stage is much tougher to pick-- so few firms have a real track record. 

Here goes.  And to make it interesting let's limit it to just three star firms in each segment:

BUYOUT (EV>$150m):  CHAMP, Ironbridge, Archer Capital.

MID-MKT ($30m-$150m): Quadrant, Champ Ventures, RMB Capital Partners.

EARLY STAGE:  GBS Venture Partners, Starfish Ventures, CM Capital.

PIPES

This morning I had a meeting with a listed company that wants us to take a 25% stake in their business.  This type of transaction is known as a PIPE, a "private investment in public equity."

A PIPE is an alternative available to publicly traded companies that need to raise money but don't want to go through the complexity of selling shares through a secondary offering.  Instead, the company finds an investor and sells him a block of newly issued shares at an agreed price or a block of debt which can later be converted into shares (a structured PIPE).

PIPE transactions often make more sense than secondary share market listings:

• Relatively small amounts of capital can be raised;
• The fund raising process should be much faster;
• Pricing is certain once the deal has been negotiated (none of the uncertainty of a book build);
• The transaction remains confidential until it's completed.  Competitors don't get warning that you're raising capital;
• It should be a cheaper way to raise money.  Investment bank fees are comparable with a secondary listing, particularly when you take into account the relatively small amounts which are often raised.  However, a PIPE often results in less equity dilution than a secondary.  To get a secondary away, it's normal to offer investors a discount off the traded share price of 10% or more.  By contrast the PIPE discount is usually less than 5%.

If you're really keen, here's an entire book on PIPES or a terrific chapter from the book.