Carried Interest

Vendor Finance?

The buyout of building services company Waco International has been getting plenty of media attention here in Australia.  It's the size of the deal, about $1.2bn, that has grabbed the headlines, but I don't think that's the real story.  Sure, Waco now ranks as Australia's largest private equity deal, but the distinction will last about thirty seconds. 

I think the real story is the structure of the financing.  UBS, who handled the sale, also offered all potential buyers a pre-approved senior and mezz debt package worth $685 million.  These pre-approved debt packages are a new feature on the local landscape, and were included in several recent sale processes.  They're intended to accelerate the sale and perhaps push up the final price. 

The Waco deal is the first one I've seen where the successful buyer (CCMP Capital) actually made use of the pre-approved package.  And I'll be surprised if stapled debt becomes a common part of the Australian private equity scene.  I think the private equity firms will just use these pre-approved offers as a stalking horse to pretty up their own financing. 

If I'm right, the investment banks will quickly lose their enthusiasm for this product. 

Carlyle and the Third Phase

Carlyle finally put an end to the local industry's suspense and announced that Simon Moore will be heading up their new Australian office. I've heard more than one person boast that they were approached but decided not to pursue the role . . . oh please.  It's a trophy job and Simon should feel thrilled and proud to have the opportunity.

The Carlye Group's arrival strikes me as a marker of a distinct "third phase" for Australian private equity.  The first phase was establishment, the pioneers, guys like Bill Ferris at CHAMP.  Funds were small, there was little distinction between private equity and venture capital, and the debt market was relatively primitive. 

The second phase, which began in the late nineties, reflected a maturing industry:  more professional and confident teams, larger funds and with them larger deals, explosive growth in the debt market, and advisors who finally understood private equity. 

And the third generation?  Fund sizes denominated in billions, secondary buyouts becoming part of the landscape, but most of all, the arrival of regional and global money.  Thanks to the terrific returns achieved by teams like CHAMP, Archer, Pacific Equity Partners, and Catalyst, Australia is on the map.  If a deal exceeds $200 million in enterprise value then the bidders will now include international funds.  Take two recent transactions:  Affinity Equity Partners out of Hong Kong won the Loscam auction and rumour has it that Carlyle and Newbridge Capital are in the final round to acquire Taverners.  The game is up, we've been well and truly discovered.