Private Equity and Retail Investors by rub18840

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									             Private Equity and Retail Investors
Australian Shareholders Association / Australian Stock Exchange
                                                    Investor Hour

                                                            15 May, 2007

                                              partnership / determination / ingenuity




                                                    Peter Yates
                                          Chief Executive Officer


                      Allco Equity Partners
Contents

1. Introduction to the structure of private equity funds.


2. Large and growing size of private equity.


3. Significant role of private equity in merger activity.


4. Private equity is dominated by wholesale funds.


5. Performance of listed private equity funds.


6. Investment culture clash between private equity and the Australian
   retail investor.
1. Overview of Private Equity

  Basic Structure


  Differences with Hedge Funds and Cash Boxes
1. Overview of Private Equity
Basic Structure

 Funds providers (Limited Partners) enter into a contractual obligation with Manager
 (General Partners) to supply funds (equity) over fixed period (usually five years) at
 call, subject to certain key criteria being met eg due diligence, threshold IRR, capital
 to be returned by year seven etc

 Manager acquires business using funds for equity and borrows senior and mezzanine
 debt secured solely against acquisition balance sheet

 Manager (General Partner) receives management fee of 2% p.a. of committed funds
 and 20% of equity returns above threshold, say 8% p.a.

 By end of fund timeline all monies returned. Manager goes out and raises new fund

 Investors objective is to achieve above average returns through Manager’s ability to
 secure assets using proprietary deal flow and/or specialist management skills
1. Overview of Private Equity
Key differences – private equity versus cash box versus hedge funds

Private Equity Funds

        Focus on owning, operating, then sale of whole business

        Strict contractual requirement eg, investment geography, due diligence.
        Together with lack of balance sheet limits investments to unlisted sector

        Timeline for acquisition and then sale is 2 - 4 years due to fund limited life.
        Any capital drawn down must be returned

        Manager performance fees emerge after several years

Hedge Funds

        Can invest in any asset class without due diligence

        Focus on short term liquid assets

        Manager’s performance measured and paid each year
1. Overview of Private Equity
Key differences – private equity versus cash box versus hedge funds

Cash Boxes

       Investment criteria similar to private equity

       No obligation to undertake due diligence or limits on investment geography.
       Capital is not repayable

       Balance sheet allows assets to be financed either non-recourse or using own
       balance sheet

       Can invest in unlisted or listed sector
1. Overview of Private Equity

Investment Class / Composition

   Buyout      –   Acquisition of large scale, mature business

   Expansion   –   Financing by equity, warrants or convertible notes of expansion
                   capital for existing business

   Venture     –   Finance for start ups, particularly in technology sector

   Other       –   Finance for business ideas or very early business plans, eg
                   Angel funds or investment in distressed debt, equity linked debt,
                   sub debt etc
1. Overview of Private Equity

 Performance
  Australian Private Equity Returns 1987-2006
  (at 30 June 2006)


                                                Pooled
                                   Number                    Upper        Median       Lower
Sector                                         Average
                                   of Funds                (% pa IRR)   (% pa IRR)   (% pa IRR)
                                              (% pa IRR)

Private Equity                         86       14.1          23.1         6.3          -2.6


Venture Capital                         31       -0.9          5.3         -0.3         -8.1

All Private Equity                     117      12.5            15          3           -5.0




Source: Thomson Financial / Wilshire
1. Overview of Private Equity

 Performance

 Private Equity Returns – Horizon Returns
 Periods to 30 June 2006


                                          3 Yr         5 Yr        10 Yr
  Sector – Australian Private Equity
                                       (% pa IRR)   (% pa IRR)   (% pa IRR)

  Private Equity                          33.5          17.7        14.9

  Private Equity and Venture Capital      29.4          14.8        12.6

  S&P/ASX300 (Accum)                      23.9          12.3        12.8




Source: Thomson Financial / Wilshire
2. Scale and Recent Growth

  In Region


  In Australia
 2. Scale and Recent Growth

 Private Equity is a large and growing asset class
                                                               Europe
 Funds Raised 2001-2005:
                                                            $153.9 Billion
                                                            (29% of total)




                                                                                            Asia
                                                                                         $32.0 Billion
United States                                                                            (6% of total)
$335.9 Billion
(62% of total)                                                                             Australia
                                                                                          $6.0 Billion
                                                                                         (1% of total)
                                                Rest of the World
                                                  $12.8 Billion
                                                  (2% of total)

Source: Venture Economics, Buyout and Venture funds raised, 2005 HarbourVest estimates
2. Scale and Recent Growth

Australia is a significant part of the fastest growing region

Five major markets in the region:
      Japan
      Australia
      Hong Kong                          South Korea             Japan
                                        South Korea
                                         South 1.4 bn
                                         USD Korea                49%
      South Korea
                                           12%
                                            (16%)
                                              11%
      Singapore
                                                           Hong Kong
                                                              11%

                                         Singapore
                                            9%
                                                                 Australia / NZ
                                                                       14%

Source: Thomson Venture Economics
 2. Scale and Recent Growth

 Australian market has grown rapidly

                   Capital Raised                                                         Sources of Capital
  AUD m                                                                                 (under management 2006)
  4,500.00

  4,000.00                                                           80%

  3,500.00                                                           70%

  3,000.00                                                           60%   51%

  2,500.00                                                           50%

                                                                     40%
  2,000.00
                                                                     30%
  1,500.00
                                                                     20%
  1,000.00                                                                             13%        13%            4%         7%        12%
                                                                     10%
    500.00
                                                                     0%
      0.00                                                                 Pension   Corporates Individuals     Banks     Governments Other
              1999 2000 2001 2002 2003 2004 2005 2006                       Funds                                 &
                                                                                                              Insurance



Source: Thomson Venture Economics, Australian Bureau of Statistics
2. Scale and Recent Growth
Financial sponsor activity in Australia – last five years
Since 2001, the sophistication of regional funds and the emergence of global funds has increased dramatically

APAC Fund Size
 Financial sponsor                            2001          2006     Affiliation
 Global funds—fly-in/fly-out
 KKR                                           na    US$16,250m1     Global Fund
 KKR Asia                                      na     UA$4,000m      KKR
 Blackstone                                    na    US$15,000m      Global fund
 Regional funds—local presence
 Affinity Equity Partners                      na       US$750m
 Carlyle Asia                          US$750m        US$1,750m      The Carlyle Group
 CCMP Capital Asia                             na     US$1,575m      JP Morgan Partners
 CVC Asia Pacific                      US$750m        US$1,950m      CVC Capital Partners
 TPG /Newbridge                        US$750m       US$15,000m      Texas Pacific Group
 Nikko Principal Investments                   na      Y$2,500m      Nikko
 Large local funds
                                                                 1
 Archer Capital                          A$200m       A$1,200m       Independent
 CHAMP                                   A$550m          A$950m      Independent
 Ironbridge Capital                            na      A$1,050m      Independent
 Pacific Equity Partners                  A$50m          $1,200m     Independent
 Mid-market local funds
 ABN Amro Capital                              na        A$300m      captive—ABN Amro
 Catalyst Investment Managers            A$180m          A$390m      Independent
 Gresham Private Equity                  A$200m          A$325m      Captive—Gresham/ Wesfarmers
                                                                 1
 Crescent Capital Partners                     na       A$300m       Independent
 Next Capital                                  na        A$265m      Independent
 Quadrant Capital                              na        A$265m      Independent
 Listed Investment Companies (‘cash boxes’)
 Allco Equity Partners                         na        A$550m      Public
 Babcock & Brown Capital                       na      A$1,000m      Public
 Macquarie Capital Alliance                    na      A$1,000m      Public

 Note: 1 = target size                                                                             Source: UBS
2. Scale and Recent Growth
Mean strategic allocations to alternative investments
Allocations to private equity in Australia are expected to increase in 2007:

North America                                                                                                              Europe
                            10                                                     9.1                                                               12                                                                             10.5
                                                                             7.7                                                                                                                                            9.8
                                    7.5    7.5         7.6                                                     7.3                                   10
        % of total assets




                                                                                                                                 % of total assets
                            8                     7                    7.1                       7.1   6.7                                                                                                            8.3
                                                                                                                                                     8                                                  7.2
                            6                                                                                                                                                6.1
                                                                                                                                                     6                                            5.3
                                                                                                                                                                  4    4.5
                            4                                   2.5                                                                                       3.6                               3.6
                                                                                                                                                     4
                            2                                                                                                                                                        1.7
                                                                                                                                                     2
                                                                                           na                                                                                                                   na
                            0                                                                                                                        0
                                          Private equity              Hedge funds                Real estate                                                    Private equity             Hedge funds                Real estate
                                                      2001   2003     2005 2007 forecast                                                                                    2001   2003    2005 2007 forecast

Source:                          The 2005–2006 Russell Survey on Alternative Investing
Note:                            2001 North American hedge fund allocation is represented by the median


Australia                                                                                                                  Japan
                            12                                                                   11.5 10.4                                           12                                                 11.4
                                                                                                           9.9
                            10                                                                                                                       10
        % of total assets




                                                                                                                                 % of total assets
                                                                                                                                                                                                  8.1
                            8                          6.9                         6.6                                                               8                                      7.1
                                    6.5                                      6.2                                                                                                                                                    6.1
                            6               5    4.7                                                                                                 6                       4.5     4.5
                                                                       4.3
                                                                                                                                                                                                                            3.4
                            4                                                                                                                        4                 2.4
                                                                                                                                                                 1.8
                            2                                                                                                                        2
                                                                na                          na                                                            na                                                    na     na
                            0                                                                                                                        0
                                          Private equity              Hedge funds                Real estate                                                    Private equity             Hedge funds                Real estate
                                                      2001   2003     2005 2007 forecast                                                                                    2001   2003    2005 2007 forecast

Source:                          The 2005–2006 Russell Survey on Alternative Investing
Note:                            2003 (2005 in Japan) is the first year that information on strategic allocation to real estate was collected. hedge fund allocations in Australia and private equity allocations from Japan
                                 2003 were drawn from a small number of respondents
                                                                                                                                                                                                                     Source: UBS
3. Significant Role of Private Equity in Merger Activity
Sponsor activity in Australia has increased significantly and is moving
toward overseas market experience


Financial sponsor activity as a percentage of total M&A value
50%

                                                 41%
                                         39%
40%
                              32%
30%                                                                27%
               23%                                          24%                                                              22%
                       23%
                                                                                        19%         20%
        19%
20%                                                                                           17%
                                                                                15%
                                                                                                                       11%
10%                                                                                                        7%   7%


0%
                     USA                               UK                                 Global                 Australia
                                                       2003       2004   2005    2006




Source: Dealogic, public announcements
Note:   Announced deals; includes entries and exits involving financial sponsors and portfolio companies
            3. Significant Role of Private Equity in Merger Activity
            The record for the largest LBO in the Australian market has been broken numerous times in 2006…
                                                                                                       18+
             18
             16
             14
             12
EV (A$bn)




             10
               8
                                                                                           5.5
               6
               4                                                                2.7
                                                        1.4         1.8
               2         1.0                 1.1

               0

                                                                                          Media

                       Dec 2003            Jan 2006   Feb 2005   Jul 2006     Sep 2006   Oct 2006     Apr 2007


            …with the largest announced deal to date being the LBO of Coles
            Source: Public Announcements
3. Significant Role of Private Equity in Merger Activity
Private Equity participation in public market transactions has increased significantly


 Announcement date   Target                          Acquirer                                 Value (EV$m)
 June 2001           Just Jeans                      Catalyst                                           125
 June 2002           Ausdoc                          ABN Amro Capital                                   305
 December 2004       Tempo                           DB Capital Partners                                150
 April 2005          Worldwide Restaurant Concepts   Pacific Equity Partners                            350
 July 2005           Baycorp Advantage               Allco Equity Partners                              785
 August 2005         Barbeques Galore                Ironbridge                                         110
 December 2005       Wattyl                          Allco Equity Partners                              290
 July 2006           Colorado                        Affinity Equity Partners                           430
 September 2006      Warehouse Group                 Pacific Equity Partners                          1,600
 September 2006      DCA                             CVC                                              2,700
 October 2006        Flight Centre                   Pacific Equity Partners                          1,400
 November 2006       Rebel Sport                     Archer Capital                                     400
 November 2006       Global TV                       Catalyst                                            50
 December 2006       Repco                           CCMP                                               570
January 2007         Veda Advantage                  Pacific Equity Partners, Merrill Lynch             850
2007                 Coles Group                     KKR, Wesfarmers/PEP                         18 billion +
3. Significant Role of Private Equity in Merger Activity

Private Equity has certain competitive advantages to public companies in takeover
situations. Listed Private Equity should benefit even more.


             Private Equity                            Public Company



    Ability to maximise leverage while         Limited scope to maximise leverage
    minimising incremental financial risk      above “public” levels

    IRR focused – able to recognise and        Short term accounting and EPS focused
    value J-curve effect of investments
                                               NPV accretive acquisitions is often not
    Less concerned about immediate             enough to justify deal
    accounting impacts
                                               Ability to create operational synergies
    Better alignment of interests with
    management through incentives
                                               Able to acquire less than 100% of Target
                                               in some circumstances
    Generally must acquire 100% of Target
 3. Significant Role of Private Equity in Merger Activity

 Low leverage in Australian public companies makes for attractive
 target


     In the current leveraged finance environment, Private Equity deals are typically
     structured with 70 – 80% debt

     The average net “book gearing” of the ASX200 is 30%, while the average net “market
     gearing” of the ASX200 is only 11%(1)

     Increasing prominence of debt financings with “covenant lite” and “PIK” features in
     Private Equity deals facilitates maximum leverage without raising financial risk
     commensurately




Source: (1) Bloomberg
 3. Significant Role of Private Equity in Merger Activity
As premiums in private transactions have risen, public company multiples have become more attractive


  The ASX200 has traded in a 1 year forward P/E multiple band of 13.5x - 15.0x in the last 3 years

  While Public Market takeover premiums has been relatively stable since 2003, acquisition multiples
  paid in Private Equity deals has increased significantly - principally driven by higher leverage
    ASX200 - 1 year forward P/E




                                  15.5x
                                  15.0x
                                  14.5x
                                  14.0x
                                  13.5x
                                  13.0x
                                  12.5x
                                  12.0x
                                                  2003                       2004              2005               2006


                                                                                    2003   2004       2005               2006
                                  Public Market Premiums (30 day VWAP)              29%    28%        35%                35%
                                  Avg Aust Private Equity LTM EBITDA x              6.1x   6.1 x      7.7 x              9.8 x
                                  Average Equity Contribution in LBOs (US)          40%    35%        32%                34%



Source: Deutsche Bank, S&P and IRESS. Average Australian Private Equity multiples only includes transactions valued over A$200m
4. Private Equity is Dominated by Wholesale Funds
Private Equity is considered to be the domain of wholesale funds
 AVCAL definition of private equity

   “Private equity funds typically have the following features…

   All investors are sophisticated (rather than retail or mum and dad) investors…”
   (refer AVCAL submission to Senate enquiry www.avcal.com.au)

 Entry point for retail investors is generally limited to three large cash boxes and listed fund of funds,
 representing less than 21% of Australian private equity commitments:

  Large Cash Boxes                Capital Raised    Small Cash       Capital        Fund of Funds           Capital
                                                      Box            Raised                                 Raised

  Macquarie Capital Alliance           $1b         Souls Private    $158.5m    ING Private Equity Access    $43m
  Group Limited                                    Equity Limited              Limited

  Babcock & Brown Capital              $1b                                     Macquarie Private Capital    $107m
  Limited                                                                      Group

  Allco Equity Partners Limited      $550m


  Total                              $2.55b                         $158.5m                                $150m
5. Performance of Listed Private Equity Funds
Poor share price performance of Australian listed Private Equity funds, regardless
of fundamentals, presents a challenge for development of the sector

 Key reasons include:

     Comparison with LIC valuation rules of thumb

     Low liquidity due to tightly held register and limited broker coverage

     Market misunderstanding of relevance of Net Tangible Assets (NTA) vs Net
     Asset (NA) of listed Private Equity compared with LIC’s
5. Performance of Listed Private Equity Funds
 Smaller listed Private Equity vehicles’ share price behave as per LIC, ie discount to NTA


                                                        IPE v SOE v MPG: Share price discount to NTA (% )

                                 30%

                                 20%
           Percentage discount




                                 10%

                                  0%

                                 -10%

                                 -20%

                                 -30%

                                 -40%
                                        Nov04




                                                                        Jul05




                                                                                        Nov05




                                                                                                                        Jul06




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                                                                                                                                                        Mar07
                                                                                                Date

                                    ING Private Equity Access Limited (IPE)                         Souls Private Equity Limited (SOE)
                                    Macquarie Private Capital Group (MPG)
5. Performance of Listed Private Equity Funds
 However, unlike LIC’s, listed Private Equity vehicles are required to consolidate goodwill (because
 they can own majority interest in a business) therefore NTA is an irrelevant comparison

 Listed Private Equity is required to publish monthly NTA until more than 50% of cash is invested

 Unlisted Private Equity funds ignore goodwill and use valuation based on cost or directors
 valuation
                                                              BCM v MCQ v AEP: Share price discount to NTA (%)

                                       70%

                                       50%
                 Percentage discount




                                       30%


                                       10%


                                       -10%

                                       -30%


                                       -50%
                                                               Jun05




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                                                                                                                                        Date

                                                                                               Babcock & Brown Capital Limited (BCM)
                                                                                               Macquarie Capital Alliance Group Limited (MCQ)
                                                                                               Allco Equity Partners Limited (AEP)
     5. Performance of Listed Private Equity Funds
        AEP is an example of the apparent market disconnect associated with the impact of
        consolidation of goodwill on NTA for listed Private Equity funds

                                                       AEP: Share Price v Net Tangible Assets v Net Assets

                          7

                          6

                          5

                          4                                                                                                                   Share Price
                     A$                                                                                                                       Net Tangible Assets
                          3                                                                                                                   Net assets
     AEP acquires
  Signature Security
with $100m of goodwill    2

                          1

                          0
                                                      Jun05




                                                                                                      Jun06
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                                                                                                                                      Feb07
6. Investment Culture Clash

Though Private Equity offers attractive returns, the timing and nature of
those returns are not consistent with expectations of Australian retail
investors

     Profit (dividend) distribution is lumpy, not regular

     Returns are generated from ‘project development’ rather than more predictable
     stable business growth

     Most unlisted Private Equity funds tie up cash and/or commitments for five years
     without liquidity

     Limited broker coverage as sector is still immature

     Accordingly, most Private Equity opportunities are not offered to retail investors

								
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