ICAA and Azure GroupCFO network eventPrivate Equity investment in the currenteconomic environment                         ...
Agenda1.   Current appetite for private equity investment in Australia2.   Impact of global financial uncertainty     a.  ...
1. Current PE investment appetitePrivate equity is still investing in Australia, with good appetite for solidbusinesses. K...
2. Impact of GFC on investment appetiteA. Sourcing of Deals / Investment opportunities2.   Emerging private businesses    ...
2. Impact of GFC on investment appetiteB. Securing equity funds to invest (equity fund raising)    Most equity funds are ...
2. Impact of GFC on investment appetiteC. Securing bank financing (senior and mezz debt funding)    “Crowding out effect”...
3. What Private Equity looks for …Each private equity firm has its own unique investment mandate, with each PE firmlooking...
4. Quadrant overview & investment appetiteQuadrant Private Equity is a leading Australian mid market private equity fund:...
Appendix 1 – PE funds raised and invested                                                                  9Source: AVCAL ...
Appendix 2 – Average equity cheque %’s                    60%                                                             ...
Appendix 3 – Average equity cheque %’s                          by equity cheque size range          70%                  ...
Appendix 4 – Drop off in PE deals since GFC                 30                                                            ...
Appendix 5 – Private equity deals by size Source: AVCAL                                                    13Source: AVCAL...
Appendix 6 – History of large Australian PE                                 deals                   6,000                 ...
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Jason Cachia CFO Network presentation March 2012

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Jason Cachia CFO Network presentation March 2012

  1. 1. ICAA and Azure GroupCFO network eventPrivate Equity investment in the currenteconomic environment 7 March 2012 Private & Confidential
  2. 2. Agenda1. Current appetite for private equity investment in Australia2. Impact of global financial uncertainty a. Sourcing of deals (investment opportunities) b. Securing equity (PE fund raisings) c. Securing debt financing (senior and mezzanine funding)3. What private equity looks to invest in4. Quadrant background and investment appetite Private & Confidential 2
  3. 3. 1. Current PE investment appetitePrivate equity is still investing in Australia, with good appetite for solidbusinesses. Key themes today versus pre GCF include:PE deals generally smaller today than 5 years agoFocus on investments that have real earnings growth opportunities rather thanfinancial engineering ability … need more than a sophisticated capital structureto generate returns!Importance of underlying cash-flows paramountLess debt available (and more expensive / restrictive covenants)Some equity commitments remaining from pre GFC fund raisingsRecent fund raisings more challenging except for the top tier playersRESULT: While PE appetite in Australia remains strong: - fewer PE firms remaining (with available equity funding) - greater focus on higher quality growth businesses - lower valuations versus boom years Private & Confidential 3
  4. 4. 2. Impact of GFC on investment appetiteA. Sourcing of Deals / Investment opportunities2. Emerging private businesses – Demand for growth capital - (higher due to lower debt availability) – Succession planning / realisation of private wealth - (generally unchanged)3. Non core divisions of larger companies – Australian corporates – (generally unchanged except when unable to refinance debt) – Local subsidiaries of international businesses – (many US and European companies looking for opportunities to repatriate cash given high $A and constrained parent balance sheets)4. Public to private transactions – Smaller mid-cap stocks more targeted (< $1.0bn market cap) due to debt funding constraints – Focus on stocks that have seen falling share prices / lost shareholder support – opportunity to acquire at lower valuation levels and turn around business to higher profitability – Still challenging – high execution risk / low success rates (despite lower market valuations)5. Secondary private equity transactions – Significant increase in secondary PE transactions (globally and in Australia) – IPO markets prove more difficult as an exit route for PE firms than pre-GFC – Larger PE funds look to buy portfolio investments from smaller PE funds and take businesses to the next level of growth (eg: QSR, Tegel, ATF, etc) Private & Confidential 4
  5. 5. 2. Impact of GFC on investment appetiteB. Securing equity funds to invest (equity fund raising) Most equity funds are provided by superannuation funds (both Australian and offshore). However, many pension funds have reduced their sector weighting to private equity since the GFC due to: − Individual fund participants requesting lower ‘risk weighting’ following GFC − Many local super funds increasing their weighting to offshore investments − Some funds exiting the PE asset class altogether (since ~5% weighting was too small) Increasing trend of Sovereign Wealth Funds (including Australia’s future fund) to provide equity (and fill the hole from declining participation of super funds) Hence, equity fund raisings have been smaller since the GCF (see appendix 1) Equity cheque commitments now higher since GFC (from <30% to >50%) as less bank leverage available (see appendices 2 and 3) Result of lower funds raised and higher equity cheque %’s is a reduction in the overall value of PE deals in recent years. PE firms have also been more selective on quality of investment opportunities (with lower overall valuations) Recent successful fundraisings over past 18 months (Archer, Quadrant and CHAMP) has led to an increase in private equity deals recently Larger global and Asian PE funds also targeting Australia leading to a recovery in PE investment appetite overall Private & Confidential 5
  6. 6. 2. Impact of GFC on investment appetiteC. Securing bank financing (senior and mezz debt funding) “Crowding out effect” of global debt markets has led to less “leverage debt” being available to fund private equity buyouts (in Australia and globally) − Sovereign debt refinancing in US and Europe - following balance sheet expansion during GFC − Corporate debt refinancing – large corporates look to secure longer term funding post GFC − Lower risk appetite from banks (also impacted by regulatory changes) Many European banks exiting Australian market (previously aggressive leverage lenders in 2005 to 2008). Now led by Australian domestic banks Most of the impact felt at the high end ($1.0bn + deals) where large underwritten facilities are no longer possible and large club deals (with 10+ banks complicated) RESULT: − Higher cost of funds to banks – hence remain leverage debt available is now more expensive − Banks insisting on tighter debt covenants (following some large PE failures during GFC) − Equity cheques required now higher – from c.30% pre GFC to c. 50% today − Leverage levels (senior debt) previously up to ~5.0x but today average around 4.0x EBITDA − Mezzanine debt was previously available for 1.0x to 1.5x (rarely used today and expensive) − Senior debt margins: Previously 200bps to 250bps … today at 400bps to 450 bps − Term debt now shorter: Previously 5 to 7 years, now 3 to 5 years Private & Confidential 6
  7. 7. 3. What Private Equity looks for …Each private equity firm has its own unique investment mandate, with each PE firmlooking to create its own ‘niche’ or ‘point of difference’ in a competitive market.Investment appetite is influenced by sector appeal, turn-around versus growth focus,varying return hurdles, and appetite for risk. Some broadly common themes include:Ability to grow earnings (via revenue / margin growth or cost out)Exit appeal – ability to IPO or sell to synergistic trade buyersStrong industry fundamentals (and market position within industry)Good management teamStrong underlying (and defensible) cashflowsPotential for synergistic mergers or bolt-on acquisitionsAbility to acquire at a reasonable price (exclusivity preferred)Low execution risk (willing vendor, avoid large auction processes)Efficient capital structure (must be able to support reasonable gearing)Equity IRR > 25% (small and mid cap) or > 20% (large cap) Private & Confidential 7
  8. 8. 4. Quadrant overview & investment appetiteQuadrant Private Equity is a leading Australian mid market private equity fund:Successfully completed 49 investments to dateConsistently achieving returns within the top quartile of PE fund managersMandate covers leveraged buy-outs, expansion capital and succession fundingRaised and invested 6 funds with over $1.75bn raised from institutional investorsOur latest fund is a A$750 million fund, raised in December 2010Some of the key investment factors include: − Enterprise value: $100m to $400m − Equity cheque: $70m to $150m (+ co-investor funds)Investment appetite strong for businesses with following attributes: − Growth businesses with an established position within attractive industry sectors − Products and services with a sustainable competitive advantage in their markets − Strong cash-flows with earnings growth − Capable and proven management teams − Clear strategy for exit Private & Confidential 8
  9. 9. Appendix 1 – PE funds raised and invested 9Source: AVCAL Pacific Strategy Partners Deal Metrics Study 2011 Source: AVCAL Private & Confidential 9
  10. 10. Appendix 2 – Average equity cheque %’s 60% 52% 50% 51% 40% 39% 31% 30% 25% 23% 20% 10% 0% FY06 FY07 FY08 FY09 FY10 FY11 Source: AVCALSource: AVCAL Pacific Strategy Partners Deal Metrics Study 2011 Private & Confidential 10
  11. 11. Appendix 3 – Average equity cheque %’s by equity cheque size range 70% 29% 30% 60% 34% 50% FY2006 40% FY2007 FY2008 FY2009 30% FY2010 FY2011 20% 10% 0% Small (Equity Inv <50m) Mid (Equity Inv 50m - 200m) Large (Equity Inv >200m) Source: AVCALSource: AVCAL Pacific Strategy Partners Deal Metrics Study 2011 Private & Confidential 11
  12. 12. Appendix 4 – Drop off in PE deals since GFC 30 120 25 100 EV of bolt-ons EV of new deals No. of new deals No. of bolt-ons 20 80 15 60 N o d e a s f . l 10 40 U D A V o b d u p n e a E s r t f ) ( l i 5 20 0 - FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: AVCALSource: AVCAL Pacific Strategy Partners Deal Metrics Study 2011 Private & Confidential 12
  13. 13. Appendix 5 – Private equity deals by size Source: AVCAL 13Source: AVCAL Pacific Strategy Partners Deal Metrics Study 2011 Private & Confidential 13
  14. 14. Appendix 6 – History of large Australian PE deals 6,000 Nine Entertainment, $5,567 5,000 4,000 Seven Media, $4,000 Redbank Energy, $3,056 3,000 m A $ DCA Group, $2,623 Healthscope, $2,649 2,000 Coates Hire, $2,113 BIS Cleanaway, Myer, $1,409 $1,828 MYOB, $1,200 Affinity Health, Stella Group, $1,311 Energy 1,000 $1,162 Veda Advantage, Developments, $819 Pacific Brands, $740 $964 Study Group, $660 - 04/01 09/02 01/04 05/05 10/06 02/08 07/09 11/10 04/12 08/13 Source: Capital IQ, AVCALSource: AVCAL Pacific Strategy Partners Deal Metrics Study 2011 Private & Confidential 14

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