Global Private Equity Barometer AustrAliA snApshot A UNIQUE PERSPECTIVE ON

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					Global Private Equity Barometer
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A UNIQUE PERSPECTIVE ON THE ISSUES AND OPPORTUNITIES FACING INVESTORS IN AUSTRALIAN PRIVATE EQUITY

Coller Capital’s Global Private Equity Barometer
Coller Capital’s Global Private Equity Barometer is a unique snapshot of worldwide trends in private equity – a twice-yearly overview of the plans and opinions of institutional investors in private equity (Limited Partners, or LPs, as they are known) based in North America, Europe and Asia-Pacific.

Australia snapshot
This special edition of the Global Private Equity Barometer on the Australian private equity market captured the views of 35 private equity investors from around the world. The Barometer’s findings are representative of the LP population investing in Australia by: Investor location Type of investing organisation Total assets under management Length of experience of private equity investing

Contents
Key topics in this edition of the Barometer include:

LPs’ returns and appetite for PE in Australia Prospects for PE dealflow Attractive sectors for GP investment Strengths of the Australian PE market Risks facing Australian PE Obstacles facing Australian venture capital Risk/return profiles of key Asia-Pacific countries

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LPs have done well from Australian buyouts
Half of investors have achieved net returns of 16%+ from their investments in Australian buyouts.

lps achieving net returns of 16%+ from their portfolios since they began investing

Australian venture – like venture in Japan & Europe – has not performed as strongly as buyouts. Just one in five LPs report returns of 16%+ from Australian venture investments.
Australian Australian Japanese Japanese AsiaAsia- European European North North buyouts venture buyouts venture Pacific Pacific buyouts venture American American buyouts venture buyouts venture overall overall

The apparently less robust performance of Australian venture has not harmed LPs’ overall returns because the weight of their exposure to Australian private equity is heavily biased towards buyouts. Overseas investors in Australian PE tend to have negligible allocations to venture, and even for Australian investors venture is a relatively small part of their overall commitments.

(Figure 1)

LPs expect strong Australian PE returns in the medium term
Three quarters of investors (77%) expect Australian buyouts to yield net returns of 16%+ over the next 3-5 years. This compares favourably with expected returns from buyouts in other areas of the world.

lps expecting net returns of 16%+ from their portfolios over the next 3-5 years

LPs also have high expectations for Australian venture – over half (55%) expect returns of 16%+.
Australian Australian Japanese Japanese AsiaAsia- European European North North buyouts venture buyouts venture Pacific Pacific buyouts venture American American buyouts venture buyouts venture overall overall

(Figure 2)

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Investor appetite for Australian buyouts is increasing
Nearly two thirds of investors in Australian PE – both domestic and overseas investors – plan to increase their allocations to Australian buyouts over the next 3 years.

lps’ planned allocations to private equity in Australia over the next 3 years

Approximately one third of investors – both domestic and overseas LPs – expect to increase their allocation to Australian venture capital, but this will be slightly offset by a reduction in allocation by one in five domestic investors.
Buyouts Venture Buyouts Venture

Australian LPs
Increase Stay the same Decrease

Overseas LPs

(Figure 3)

investors with commitments to Australian Gps

Overseas investors to increase commitments to domestic GPs
Only a quarter of overseas investors (27%) have thus far chosen to invest in Australian private equity via domestic GPs – the majority (73%) choosing to invest via global or pan-Asian funds.

Domestic GPs have unsurprisingly been the route of choice for the majority of Australian investors (88%).
Currently Next 3-5 years Currently Next 3-5 years

Over the next 3-5 years, however, overseas investors intend to make more commitments to Australian GPs.
(Figure 4)

Australian LPs

Overseas LPs

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LPs believe pressure on GPs to provide low-fee funds will benefit returns
Three quarters of investors (77%) think that the pressure on GPs to provide low-fee funds in Australia will have a positive impact on private equity returns in the long term.

how the pressure on Gps to provide low-fee funds will impact lps' long-term returns

Impact on LPs’ returns will be negative (23%)

Impact on LPs’ returns will be positive (77%)

(Figure 5)

Australia's PE dealflow expected to change complexion
Distressed/turnaround situations are expected to deliver a greater proportion of Australian PE dealflow over the next 3 years, with growth capital opportunities and buyouts also expected to become more significant.

sources of pE dealflow in Australia over the next 3 years – lp views

Start-ups

Growth capital

Distressed/ turnaround

Buyouts

Public-toprivates

Increase

Stay the same

Decrease

(Figure 6)

61% of investors also expect PE’s share of Australian M&A to increase over the next 3 years; only one in five expect it to decrease.

likely changes in pE’s share of Australian M&A over the next 3 years – lp views

Decrease (18%)

Increase significantly (15%)

Stay the same (21%) Increase moderately (46%)

(Figure 7)

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LPs' views on the three best sectors for GP investment
Almost all LPs (over 90%) expect mining & natural resources, healthcare, and retail & leisure to be attractive sectors for GP investment in Australia over the next 3 years.

the best sectors for Gp investment in Australia over the next 3 years – lp views
Mining & natural resources Healthcare Retail & leisure Industrial manufacturing & services Financial services Real estate & infrastructure Technology & biotechnology

Attractive

Unattractive

(Figure 8)

Conditions for PE are good in Australia
The conditions for private equity investment in Australia are regarded very positively by investors.

strengths and weaknesses of the Australian private equity market – lp views
Sophistication of capital markets Macro-economic climate Regulatory environment IPO market

The sophistication of Australia’s capital markets and the country's macro-economic climate are seen as particularly strong plus points.
Availability of bank debt Taxation for PE investors

The majority of LPs (94%) think taxation is now at an acceptable or attractive level for the Australian private equity industry.

Attractive

Acceptable

Unattractive

(Figure 9)

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Competition and scarcity of PE talent are greatest risks
Private equity is a highly skill-based investment discipline, and LPs believe scarcity of PE talent is the single greatest risk facing the Australian private equity industry over the next few years (73% of investors).

risks facing Australian pE over the next few years – lp views
Scarcity of PE talent Increasing competition for PE dealflow Deterioration in the economic climate Availability of exit opportunities Shareholder rejection of public-to-private offers Regulatory/ tax changes Press and public attitudes to PE

Two thirds of LPs (67%) are concerned that increasing competition for dealflow will negatively impact returns.

Less than a quarter of LPs (23%) think the attitudes of the media or the general public are a significant risk to private equity in Australia.
Significant risk Small risk

(Figure 10)

The impact of leverage levels on buyout returns
A third of LPs (35%) believe that the leverage multiples being applied to buyouts in Australia will reduce Australian buyout returns across the board, while another third (32%) believe the effect will be restricted to some buyout funds only.

the likely impact on lps' returns of current leverage multiples in Australian buyouts – lp views
Reduce returns in a small number of portfolio companies in Australia only (10%) Reduce Australian buyout returns generally (35%)

No impact on returns (23%)

Reduce returns in some buyout funds in Australia (32%)

(Figure 11)

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Skills and track records are in short supply in Australian venture capital
Two thirds of investors (62%) cite a lack of GPs with the necessary skills and track record as a key factor reducing the attractiveness of venture capital in Australia.

Factors impacting the attractiveness of Australian venture capital – lp views
Too few GPs with the necessary skills & track record Exit routes are too few/too weak Entrepreneurs reluctant to share ownership of businesses Unfavourable regulatory/ tax environment Australian marketplace is too fragmented

Another limiting factor is seen to be the relative underdevelopment of exit routes for Australian venture capital – 48% of LPs think exit routes are too few or too weak.

Insufficient access to international commercial/ capital markets

Significantly reduces attractiveness

Not really a factor

(Figure 12)

Overseas LPs believe it is too easy for ‘weak’ GPs to raise funds in Australia
Over half of overseas LPs (54%) say it is too easy for weak GPs to raise funds in Australia. One third of Australian LPs (31%) are of the same opinion.

Ease with which weak Gps can raise funds in Australia – lp views

Australian investors
Yes – it’s too easy for weak GPs to raise funds in Australia

Overseas investors
No – it’s not easy for weak GPs to raise funds in Australia

(Figure 13)

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Australian LPs’ appetite for overseas investment may divert funds from domestic GPs
Almost half of investors (48%) think the increasing appetite of Australian LPs for overseas investment will divert LP commitments away from domestic GPs.

impact on domestic Gps of Australian lps' increasing appetite for overseas investment

No – it will not divert funds away from domestic GPs (52%)

Yes – it will divert funds away from domestic GPs (48%)

This effect will be counteracted to some extent by the strengthening appetite of overseas investors for Australian PE.

(Figure 14)

Australia will vie with India, China and Japan for LP money
Australian LPs see Australia as having the best risk/return profile of any Asia-Pacific PE market over the next 3-5 years, followed by Japan and India.

the 3-5 year risk/return profiles of Asia-pacific pE markets – Australian investors’ views

Australia Japan India China Hong Kong Korea Taiwan Singapore Vietnam Malaysia Thailand

1 2 3 4 5 6 7 8 9 10 11

(Figure 15)

For overseas investors, India has the most favourable risk/ return profile followed by Australia and then China.

the 3-5 year risk/return profiles of Asia-pacific pE markets – overseas investors’ views

India Australia China Japan Hong Kong Taiwan Thailand Singapore Vietnam Korea Malaysia

1 2 3 4 5 6 7 8 9 10 11

(Figure 16)

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Global Private Equity Barometer – Australia Snapshot
Respondent breakdown
Coller Capital’s Global Private Equity Barometer researched the plans and opinions of 35 investors with commitments to private equity funds investing in Australia (either through Australia-dedicated funds or through more broadly-focused funds with an allocation to Australia). Based in Asia-Pacific, Europe and North America they form a representative sample of the LP population investing in Australia.

Respondents by region
North America (26%)

Australia (48%)

Europe (17%) Other Asia-Pacific (9%)

(Figure 17)

Respondents by total assets under management
Under $500m (11%) $500m-$999m (3%) $1bn-$4.9bn (11%)

About Coller Capital
Coller Capital, the creator of the Barometer, is the leading global investor in private equity secondaries – the purchase of original investors’ stakes in private equity funds and portfolios of direct investments in companies.
(Figure 18)

$50bn+ (27%)

$20bn-$49.9bn (14%) $10bn-$19.9bn (11%)

$5bn-$9.9bn (23%)

Research methodology
Respondents by type of organisation

Research for the Barometer was undertaken for Coller Capital in August-September 2007 by IE Consulting, a division of Incisive Media, which has been conducting private equity research for 18 years.

Other pension/superannuation fund (17%)

Bank/asset manager (11%) Corporation (6%) Endowment/ foundation (11%) Family office/ private trust (3%) Gatekeeper (9%) Insurance company (17%)

Public pension/ superannuation fund (23%) Corporate pension/ superannuation fund (3%)

Notes:
Limited Partners (or LPs) are investors in private equity funds General Partners (or GPs) are private equity fund managers In this Barometer report, the term private equity (PE) is a generic term covering venture capital, buyout and mezzanine investments

(Figure 19)

Respondents by year in which they started to invest in Australian PE
Before 1990 (10%) 1990-94 (13%) 2005-07 (43%)

1995-99 (24%) 2000-04 (10%)

(Figure 20)

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