Carried Interest

More Private Equity Ping Pong

 
Photo: K Gradinger

Greg Minton (Archer Capital), Robin Bishop (Macquarie Capital) and Greg Clark (Westpac) discuss secondary buyouts in The Australian:

MINTON: The other factor is management. They’re a stakeholder, a shareholder. They are trading off going through the grief of being publicly listed with going again with a different private equity investor. Many are asking if they can go and find another private equity buyer that might back my team for the next five years. So the secondary market is also being driven by many management teams saying they enjoy this environment. It seems much more user-friendly than the public market.

BISHOP: I think the issue of one private equity firm selling to another private equity firm says more about the issues associated with the listed market than it does about the private equity market. The listed market will be thinking of how it can ensure it gets quality businesses on our exchange. Listed companies come under tremendous public scrutiny, personalisation of management, media reviewing every step they take. Whereas if you’re a manager working for a business owned by private equity, the focus can be on the business to a greater extent. How much time would a CEO of a listed company spend talking to investors, dealing with media, etc? It’s enormous.

CLARK: As a lender we like the secondary buyout story because it’s a company that’s lived with a leveraged finance debt structure and the focus on cash flow that this requires. Management is used to the demands.

Private Equity Ping Pong

Photo: CM.Yong

Investors in private equity funds are at best ambivalent about the practice of firms selling their portfolio companies to other PE managers– a "secondary" buyout. 

The debate around secondaries is especially fierce in smaller markets like Australia because our LPs are exposed to a larger proportion of the active private equity funds than their American or European counterparts.  If you're an investor in CHAMP's fund then you're probably also in Ironbridge, Quadrant and PEP.

 LPs typically raise two concerns about secondary buyouts:

1. I'm an investor in both the selling and the buying fund.  One team claims that they've sold out for an outrageously high price, but the other manager says he's stolen the company.  Both can't be right, so is there any reason why I should be happy?
2. Even if I'm not a seller and a buyer, is this even a good investment?  If a private equity firm is selling haven't they already extracted the easy value from this asset?

As the Australian market has matured secondary activity has steadily increased.  Examples that jump to mind are GenysisCare, Loscam, Taverner, APP, Bluestone, ATF, Study Group, and WorldMark. 

Despite the discomfort with secondaries among LPs and the poor performance of some recent transactions, I'm calling a secondary buyout boom over the coming months.  The IPO window is firmly shut, there are 150+ companies sitting in Australian private equity hands . . . and the clock is ticking. 

Gathering dust

Photo credit: Tormod Sandtorv

I was tidying up the bookshelves this evening and came across a real vintage piece, some serious nostalgia:  a 1998 edition of the Australian Venture Capital Guide. 

In truth, at least by today's standards, Australian private equity barely existed back then.  It's disconcerting to reflect on how much has changed in just 12 quick years.  This was before Pacific Equity Partners, before Ironbridge, before Quadrant, and long before global firms like KKR and CVC arrived.  This was before Australian law firms had private equity specialists, before the accounting firms had TS divisions, and before any of the local banks had proper financial sponsors teams. 

We were still a bunch of learning-on-the-job venture capitalists.  Only a handful of firms had actually used debt in a PE deal.  Get this:  of the 87 firms that claimed to be venture capitalists, only 14 had more than $100m under management . . . and some of them were stretching the truth!  

Just five real private equity firms from 1998 are still in business today:  Advent, Archer (GS Equity), Catalyst, Equity Partners and CHAMP (Aussie Mezz). 

Fund Raising Watch - #3

It has been a year since I wrote a piece called Australian Survivor . . . Fund Raising Watch.

At that time there were about ten Australian or New Zealand PE firms in the market seeking to raise a fund.  They included:

1. CHAMP
2. Direct Capital
3. Anchorage
4. Gresham Private Equity
5. Tasman
6. Mainridge
7. Propel
8. Harbert Australia
9. Pinnacle Private Equity
10. AMP Private Equity

So how has it played out?  Was the 2009/2010 fund raising vintage as challenging as I feared it would be? 

Sadly, it was actually even worse.  Just three of the firms, CHAMP, Direct Capital and Anchorage, successfully closed new funds.  Hooray!  Well done guys. 

For the others it's been an ugly twelve months and some must be facing tough decisions.  It's well known that AMP Private Equity and Mainridge are managing out their portfolios and exiting the industry.  And I hear that Propel has formally suspended their fund raising activities.  

Will 2010/2011 be any brighter for private equity fund raising?  At the moment it's very quiet out there.  Allegro is trying to raise $200m and off the back of their success with the ABN AMRO portfolio will probably succeed.  Clark Perkins' Mercury Fund is seeking $100m from high networth individuals and has already reached a first close thanks to strong New Zealand support.  And Blue Sky Private Equity has recently kicked off a $50m raising. 

The real test will come in the fourth quarter when a number of "franchise" firms return to the market for new capital.  These are expected to include:  Ironbridge, Quadrant, Champ Ventures, and Crescent Capital.