Backlog

Private auctions have certainly helped to clear some of the excess, but there remains a considerable backlog of shelved assets waiting for stability to return to the share market. O’Brien said some portfolio companies, especially larger ones, are simply not  suited to private equity sales and have their natural home in listed markets. Other assets suited for private sale simply cannot find the right buyer.

"There are many assets which have been ready to exit in the past 12 months but cannot reconcile the gap in buyer and vendor expectations in terms of valuation," O'Brien says. "Vendors are demanding a value from pre-GFC levels and the purchaser is unwilling to pay that given the slump in the debt and equity market."

The gap is closing now as vendor expectations become more realistic and debt becomes more readily available, but the mismatch in price expectations means many assets remain on the shelf. Ananda says that inactivity does not equal stagnancy in the backlog room. "Rather than adding to their portfolios, private equity firms are redirecting their focus to their existing portfolios, injecting money into portfolio restructure and growth."

Assets which are parked are not stagnating, but continue to grow and accrue in value.

Different dynamics
O’Brien said that banks, and especially domestic banks, are increasingly willing to lend but generally liquidity is still limited. Compared to pre-GFC dynamics, a PE market starved of debt is a very different beast.

Restricted capital has concentrated most of the trade sales activity onto the mid-market. “There is a noticeable absence in large transactions north of $500m, but deals in the $200-300m [range] have continued to flow in,” Ananda says. While the Australian mid-market has always been active, its importance relative to the big ticket deals that dominated the market prior to the GFC has increased dramatically.

An increasing proportion of acquisitions have been equity funded. “The debt market is still tight,” Humphrey says. “We are seeing many more 100% equity buyouts rather than leveraged ones.” Vendors are also seeking humbler beginnings and pursuing, at least initially, minority ownership. “There are lots of buyers who want to get a footprint in, but don’t have sufficient funds to secure a controlling interest,” O’Brien said.

The long-term plan is to buy out the majority at a later stage. Many are happy just to remain in the minority as long as they have negative control in important areas under shareholder arrangements, for example to force an exit or drag along rights.” An alternative plan is to pursue bolt-on acquisitions. “Rather than going for a large entry point acquisition, purchasers are looking to buy a smaller entry point asset and grow it through further bolt-on acquisitions,” Ananda said.

The current dominant paradigm of mid-market trade sales resembles private equity patterns in Australia in the early 2000s. “There is less focus on financial structure, more on operational activity, “Humphrey said. “We are seeing the Australian PE market return to its roots.”

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