Report

MARCH 2014

Australian Private Equity Market Wrap 2013 and outlook for 2014
Welcome to this review of the Australian private equity market in 2013 and our views of the outlook for 2014. The Co-Heads of Private Equity at Allens, Tom Story and Mark Malinas, report. Some light ahead?
The year 2013 was a mixed year for Australian private equity deal activity. Rising equity markets stimulated a strong exit market in the second half of 2013, marked by a flurry of sponsor IPOs. However, continued availability of cheap financing and improving economic optimism meant sponsors faced strong competition for new acquisitions. On the fundraising front, the environment continued to be challenging as local managers were forced to scour offshore markets to find support for new funds.

Acquisition activity
In terms of new acquisitions, the year commenced with a significant transaction TPGs circa A$1 billion buyout of Inghams Enterprises. With the support of strong debt markets, it appeared that the Inghams deal would herald a resurgence of large leveraged buyouts in the Australian market. This did not prove to be the case. While larger buyouts were more common in the United States (eg Dell by Silver Lake and Heinz by Berkshire Hathaway and 3G Capital), further larger-scale transactions did not eventuate in this market. Although private equity sponsors participated in various auctions during the year, there was strong competition from trade buyers as confidence returned to corporate Australia post the Federal election in September 2013. Public to private transactions were also difficult to execute as rising equity markets pushed valuations beyond the reach of sponsors. Although opportunities abound in distressed segments of the market such as mining services, the cyclical nature of these businesses largely dissuaded sponsors from venturing into these areas.

Exit activity
The second half of 2013 has seen a flurry of sponsor-backed IPOs, highlighted by transactions such as Virtus Health (Quadrant), Dick Smith (Anchorage), Veda Group (PEP) and Nine Entertainment (Oaktree and Apollo). Anchorages turnaround of the Dick Smith Electronics chain following its acquisition in 2012 is universally regarded as one of the private equity deals of the year. Bought for an initial cash outlay of A$20 million and subsequent deferred consideration on exit, the IPO raised in excess of A$300 million. Anchorage also retained a 20 per cent interest in the company. Overall, an outstanding result for Anchorage. One of the trends evident in the current batch of sponsorbacked IPOs is increasing fund manager pressure for sponsors to retain a significant stake to ensure alignment of interest with new investors. For example, PEP elected to retain a majority shareholding as part of the Veda Group IPO a decision vindicated by the very strong post-listing trading performance of the Veda Group. Equally, however, extremely strong investor demand for Virtus Health saw Quadrant exit its entire stake. So the question of whether sponsors should be retaining a post-listing stake remains a deal-specific issue for sponsor IPOs in the Australian market. The early indications in 2014 are that investor demand for new IPO product may have waned slightly, compared to the growing pipeline of new offers. However, after several years of subdued activity, we expect to see a continued strong market for quality sponsor assets from fund managers looking for new growth opportunities in equity portfolios. The opening of the IPO window following the Virtus Health transaction also spurred on trade buyer activity, resulting in a number of strong private equity exits to trade buyers (both domestic and offshore). Interest is certainty sector-specific and not across the entire market. Mining, construction and related service businesses remain difficult. Both Coates and Bis Industries pursued refinancing transactions as an alternative to exits. However, interest remains strong across a variety of other sectors, prompting the return of genuine dual-track processes to the Australian M&A market.

Managing sale processes

Last year, we reported that allegations of bid rigging and misleading and deceptive conduct hit the courts in Australia. European-based private investment firm Pala Investments was successful in its action against Bradken (among others) in relation to the conduct of the sale process of Norcast, a mining services business. Pala had sold the business to Castle Harlan for US$190 million in July 2011. A short time later, Castle Harlan on-sold the business to Bradken, a competitor of the business, for US$212 million. Breaches of competition laws were found by Justice Gordon in the Supreme Court of Victoria at first instance and damages of US$22.4 million were awarded by the court. The decision highlights the importance of carefully drafted confidentiality agreements and process arrangements to ensure complete transparency of bidding participants in an auction.

Alternative debt providers

We continue to see growth in the market for funding by alternative debt providers. While some of these providers are focused on infrastructure investments, others are more broadly looking at corporate and leveraged buyout debt, including senior. There has also been interest locally in uni-tranche loans, a product used primarily in Europe by sponsors that offers the flexibility of a bundled senior and mezzanine debt product with a sponsor paying a blended margin, leaving a separate sell down of the senior and mezzanine piece post-acquisition. Alternative debt is also able to be readily sourced from offshore with the high yield term loans (TLBs) providing alternative sources of financing for bidders of assets. TLBs have also been used successfully to refinance existing debt or in structuring dividend refinancings. It remains to be seen whether TLBs will find their place as a significant source of acquisition debt for sponsors in the Australian market, given the flexibility it can offer sponsors to run the business without the same level of traditional bank oversight. The dual track of TLB and traditional bank debt processes run on the Inghams transaction showed a willingness on the part of sponsors to consider TLBs as legitimate acquisition debt options. However, given the need for cross-currency swaps, the ticket size for TLBs seemingly sitting around A$500 million and above, the difficulty with TLB lenders providing working capital and competitive pricing from the local banks reluctant to lose market share may mean that the package offered by traditional bank lenders is still preferable.

Fundraising
Fundraising remains challenging for local private equity sponsors, as many Australian superannuation funds continue to wind back allocations to alternative asset classes. Anacacia Capital (A$150 million), Anchorage (A$250 million) and Advent Private Capital (A$200 million) were among the local sponsors to successfully tap the market in 2013. The sums raised by sponsors in Australia was, in aggregate, lower than in prior years, and sponsors are increasingly needing to look offshore for funding. We expect this trend to continue, with many sponsors now obtaining 50 per cent or more of their funding from offshore. With that said, some outstanding exit results were realised in 2013, which should serve well those sponsors rattling the can in 2014 and 2015. New fund activity is also seeing discussions with LPs on more customised fee arrangements, as investors press for alternatives to more established fee models. Achieving true alignment of interest will continue to be a fundamental feature of GP/LP discussions as new funds are pursued.

Further thoughts on 2014

We expect that the burst of exit activity in the second half of 2013 should continue into 2014, providing some exceptional returns for LPs in Australian private equity funds. The potential IPO of Healthscope is eagerly awaited by fund managers seeking further ASX-listed healthcare opportunities, subject to pricing of course. The challenge for Australian sponsors will continue to be on the acquisition front, where buoyant equity markets and increasing corporate confidence have combined to price out sponsors in relation to many new deal opportunities. Much of the new acquisition activity may come from bolt on deals, where sponsors can take advantage of existing market positions and the availability of cost and revenue synergies to find an edge in competitive auction processes. Sponsors prepared to do the hard work building long-term relationships with entrepreneurs in the mid-market across Australias SME sectors should also continue to be rewarded with proprietary opportunities in the A$20 million A$200 million EV range. Certainly there is also ample debt and equity capacity to support larger leveraged buyouts if the right opportunities present themselves and the stars align in deal execution. Platinum Equitys A$454 million acquisition of a 70 per cent stake in Telstras directories business, Sensis, in the early part of 2014 stands as another example of a sponsor finding a significant turnaround opportunity to pursue with conviction.

Allens private equity deals in 2013 and early 2014 (to Feb)
Private Equity Sponsors
Investment
Actrol Bluestone Group Australian Satellite Communications and Pactel Jarvie Engineering Securency International

Our role
Advised Catalyst Investment Managers on its A$280 million sale of Actrol Parts and A.C Components to Reece Australia Limited. Allens acted on the original acquisition of both businesses. Advised mid-market private equity company LDCs acquisition of Crescent Capital and the Liberman familys stakes in non-conforming lender and asset management company Bluestone Group. Advised TA Associates on its Hong Kong-based global network and satellite communications service provider investee SpeedCast Ltd.s acquisition of Australian providers Australian Satellite Communications and Pactel. Advised AEA Investors LP portfolio company Swanson Industries acquisition of the Jarvie Engineering hydraulic cylinder engineering business. Advised Arle Capital Partners and its portfolio company, Innovia Film, on their A$65 million buy-out of the remainder of shares in Securency International from the Reserve Bank of Australia.

Vendors to Private Equity Investment

Billabong International Lend Lease aged care Nintex Nitro Circus Live

Our role
Advised Billabong International on the companys recapitalisation by Oaktree and Centerbridge. We previously advised on the responses to a series of prior proposals by Sycamore Partners and Altamont Capital Partners and an original offer by TPG. Advised Lend Lease on the A$270 million sale of its Australian aged care business to Australian private equity firm Archer Capital. Advised Nintex Group Pty Ltd on its US$222 million takeover by TA Associates and Updata Partners. Advised Nitro Circus on the sale of a A$25 million stake in Nitro Circus Live to The Raine Group.

Financings Investment
Inghams Zip Industries Link SCA Hygiene Spotless Group Peters Ice Cream Genesis Care

Our role
Advised the lenders to TPGs acquisition of Inghams. Advised the lenders to Quadrant Private Equitys acquisition of a majority stake in Zip Industries. Advised Macquarie Group Ltd on its acquisition, together with Intermediate Capital Group PLC, of a 25 per cent stake of Pacific Equity Partners share registry operator Link Administration Holdings Pty Ltd. Advised the lenders on Pacific Equity Partners dividend recapitalisation of its investment in SCA Hygiene Australasia. Acted as Australian counsel to the lead arrangers to Pacific Equity Partners dividend recapitalisation of its investment in the Spotless Group facilities services company via a Term Loan B financing. Advised Pacific Equity Partners on its dividend recapitalisation of its investment in Peters Ice Cream. Advised the lenders to KKR on its dividend recapitalisation of its investment in the Genesis Care medical business.

Contacts

Tom Story Co-head of Private Equity Partner, Corporate

T +61 2 9230 4812 Tom.Story@allens.com.au

Mark Malinas Co-head of Private Equity Partner, Corporate

T +61 3 9613 8485 Mark.Malinas@allens.com.au

Richard Kriedemann Partner, Corporate

T +61 2 9230 4326 Richard.Kriedemann@allens.com.au

Richard Bell Senior Overseas Practitioner, Corporate

T +61 2 9230 4077 Richard.Bell@allens.com.au

Emin Altiparmak Senior Associate, Corporate

T +61 3 9613 8510 Emin.Altiparmak@allens.com.au

Richard Gordon Partner, Finance

T +61 2 9230 4096 Richard.Gordon@allens.com.au

Mark Kidston Partner, Finance

T +61 2 9230 4419 Mark.Kidston@allens.com.au

Tom Highnam Partner, Finance

T +61 2 9230 4009 Tom.Highnam@allens.com.au

Tim Stewart Senior Associate, Finance

T +61 2 9230 4109 Tim.Stewart@allens.com.au

Jo Folan Senior Associate, Finance

T +61 2 9230 4625 Jo.Folan@allens.com.au

Allens is an independent partnership operating in alliance with Linklaters LLP.

Allens 17882