Australia faces private equity challenge

Australia’s $21 billion private equity funds could be cut by up to a quarter thanks to a loss of investor confidence, according to Reuters. Australia is home to about 50 buyout firms, 15 venture capital firms and 10 global private equity firms.

(Reuters) – Up to a quarter of funds in Australia’s $21 billion private equity industry could close as investors lose patience with weak returns at underperforming firms, buyout executives say.

New fund-raising is also becoming more difficult, with investors turning cautious after a limited number of private equity sales over the past three years has stretched the period without returns, the executives said.

“Perform or perish is what is going to happen,” Jon Freeman, partner at global private equity firm Coller Capital, told the industry’s biggest annual conference, which is being held this week in Australia’s Gold Coast resort area.

“The bad guys who do not do so well will not fund-raise and will go out of business,” he said, adding that consolidation was a “very kind term” for what lay ahead.

Consolidation is the overriding theme of the conference, which brings together investors in private equity, bankers and lawyers as well as the buyout and venture capital firms.

Freeman said five-year returns for private equity investors through to mid-2009 averaged only 4.6 percent, reflecting the difficulty private equity funds have in exiting their investments and realising capital returns for their investors.

Australia’s private equity industry comprises about 50 local buyout firms, 15 venture capital firms and 10 global private equity firms, including TPG [TPG.UL], Kohlberg Kravis Roberts (KKR.N: Quote, Profile, Research, Stock Buzz) and CVC [CVC.UL], according to the Australian Private Equity and Venture Capital Association.

Poor returns will force the industry to “rationalise” weak performers, Archer Capital managing partner Peter Wiggs said.

“If this was a very rational process you might see the numbers (of firms) halved, but I don’t think that will happen. I think about 25 percent is where it lands, so the bottom quartile are gone,” Wiggs said.

Even association chairman Andrew Rothery conceded that 10-20 percent of local firms would likely shutter their doors.

There have been few exits by local funds this year, either trade sales or secondary deals to other buyout firms. Initial public offers above A$100 million ($95 million) have been extremely rare in the Australian market in 2010, with a number of private equity-owned businesses putting float plans on hold until 2011 in the hope that volatile markets will settle.

‘CAPITAL STRIKE’

The top Australian private equity firms, including CHAMP Private Equity, Pacific Equity Partners (PEP), Archer Capital and Ironbridge, all attract a large proportion of their investors from offshore but fundraising this year has proved a tough sell.

“There is probably a capital strike locally, a lot of long-term investors are pulling out,” said Macquarie Group division director of alternative investments Michael Lukin.

Tasman Capital Partners has been in the market for more than a year raising a $200 million fund, while Gresham Private Equity is raising a A$150 million fund, much smaller than its last A$325 million fund raised five years ago.

The peak of fundraising in the local market was 2008, before the financial crisis hit, with a total A$5.5 billion raised including a $2.8 billion fund for PEP.

Industry executives suggested that media reports of up to A$4 billion in new local private equity fund-raising this year were optimistic amid the post-crisis mood of caution.

“Investors are interested in Australia and interested in the region, but they are careful about who they select,” CHAMP managing director David Jones told Reuters.

CHAMP is raising a third buyout fund from local and international investors, aiming to raise A$1.0 billion-A$1.5 billion and will close by the end of this year.

Its CHAMP II fund raised A$950 million in 2005 and attracted about two-thirds foreign investors and one-third domestic. Not all investors are unhappy.

David Brown, head of private markets at Victorian Funds Management Corp, a big domestic investor, said he was quite pleased with the past financial year’s return from private equity sales, which included TPG’s float of Myer (MYR.AX: Quote, Profile, Research, Stock Buzz) last November.

VFMC, which manages funds for Victorian state government authorities, has A$35 billion in total funds under management, including an allocation to private equity.

Brown likened a stream of recent requests to commit funds to new private equity fundraisings to waiting for public transport.

“It’s like waiting for a tram — there’s nothing for ages and then they all come at once.” ($1=1.048 Australian Dollar) (Reporting by Victoria Thieberger; editing by Mark Bendeich and Muralikumar Anantharaman)