When TPG and Blum Capital announced their intention to float Myer on the ASX, it marked the first major asset sale by a private equity firm since the global financial crisis started. Shortly after, Goldman Sachs Private Equity and Quadrant Private Equity announced that they were going to dual-list outdoor clothing retailer Kathmandu on both the Australian and New Zealand stock exchanges and in doing so provided further evidence that private equity firms have the option of exiting assets. But do these deals mean it is business as usual for private equity firms or are these exits the exception rather than the rule?
The answer is that exit opportunities exist – for the right assets. “There are some good exit opportunities emerging for private equity funds but that’s probably only for select assets,” says Allens Arthur Robinson partner Tom Story. “It’s certainly not across the board in terms of their portfolio.”
The type of asset held often tictates the exit strategy, of course. “The first type of asset that is looking attractive in terms of exit opportunities right now are some of your big brand name assets with good growth prospects like Myer and Kathmandu, which are very attractive for an IPO exit” Story says. “The second type of asset would be those that have strategic value for corporates that can afford to fund acquisitions right now.”
A recent example of the latter would be CHAMP Private Equity’s sale of United Malt Holdings (UMH) to Graincorp in a deal that involved Baker & McKenzie, Gilbert + Tobin and Mallesons. Clayton Utz and Freehills acted on both deals along with Sullivan & Cromwell on the Myer float and Chapman Tripp on the Kathmandu deal.
Private equity firms will often go down the dual track route exploring both a public listing and a private sale to extract the maximum value for their asset. This provides more work, and more fees, for law firms but works out as a win-win because of the increased value gained for the private equity client.
“You’ll probably see in this market where it is a bit more volatile private equity firms will hedge their bets by going dual track,” says Mallesons partner Lee Horan who worked with CHAMP on the UMH sale. “There are some synergies by going dual track. It is good in terms of there’s quite a bit of work to be done on the legal side of things but it is equally beneficial for the client.”
Timing is critical in offloading assets. Most private equity houses prefer to hold onto acquisitions for two to three years before selling them on. The onset of the GFC prevented many assets that were being prepped to be sold from reaching market. The backlog this created could mean a surge of legal work is imminent.
“There is a bit of a backlog of assets at the moment that were picked up in more buoyant times,” Story says. “If conditions continue to improve next year, you could see a flood of assets hitting the market.” Private equity firms are, in fact, walking a tightrope. While there is significant risk involved in being the first to market after the economic turmoil, there is also a need to not get stuck at the back of the queue.
“For the entire period of the GFC most private equity houses put their exits on hold but, now that those debt markets are thawing, people are thinking of pulling forward their exits,” Horan says. “I think it will be important to be at the front of the queue so you might find that there will be some renewed interest over the next few months to get exits on track.”
Speculation that Sydney-based Pacific Equity Partners is looking to offload the Hoyts cinema chain and its Link Share Registry business along with Archer Capital mulling an exit from retailer Rebel Sport indicates that private equity houses are back in business and, while it is far from business as usual, it is certainly good news for the law firms that are able to pick up their business.
Private equity deals