Private Equity Tipped For Belated Take-off

The Age

Thursday July 20, 2006

ROD MYER

PRIVATE equity is expected to increase its importance in the Australian capital markets significantly in the next two years.

Despite recent high-profile deals, the sector is still smaller than in major offshore capital markets.

Private equity groups raised $3 billion last year while the public equity markets raised $42.5 billion from investors, making private equity about 7 per cent of total raisings.

Paul McCullough, a director Pacific Equity Partners, said "private equity in Australia is just getting into second gear".

While the sector was making its presence felt in the market for listed companies - with Affinity's $430 million bid for retailer Colorado Group the latest example - it was still well behind its British counterpart in influence.

In Britain, private equity accounted for about 40 per cent of deal numbers in the corporate merger and acquisition area, Mr McCullough said. As a result, one in five workers in the corporate sector was now working for companies owned by private equity investors, he said.

Private equity was also skyrocketing in the US, Mr McCullough said. When the Bain group, with which PEP is associated, made its first capital raising in 1998 it went to the markets for $US700 million ($A935 million). Recently Bain completed a $US6.4 billion raising and competitor Blackstone had recently raised $US15 billion, he said.

James McMurdo, a private equity specialist with Goldman Sachs JBWere, said Australia was still well behind the British experience.

"Businesses have been going there for 20 years or so and many of the funds have very big portfolios," he said.

As a result they had become significant forces in specific industry sectors and could buy competitors operating in the same areas as their existing investments and gain synergies as a result.

So big had the sector become in Britain that there were "lots of transactions in the space" where private equity firms traded assets between themselves.

In Australia, the sector was still in its infancy and many of the large overseas players were just arriving in the market, Mr McMurdo said.

Also, company boards had been reluctant to engage with private equity. "They view them as being bottom feeders and (selling out to them is) an admission of failure," he said.

The key to success in private equity is using high levels of debt to buy out equity holders and giving management huge incentives to turn companies around.

A private equity deal usually gears companies at about five to seven times earnings before tax, depreciation and interest compared with about two or three times earnings before interest, tax, depreciation and amortisation (EBITDA) for listed vehicles.

"In a listed company you can't run with that leverage structure as you've got to pay dividends," Mr McMurdo said.

KEY POINTS

? Private equity is skyrocketing in the US.

? The sector is still in its infancy in Australia.

? High levels of debt are a hallmark of the process.

LINK

? www.blackstone.com

© 2006 The Age

Back to News Index | Back to Home