PE continues to perform but challenges ahead
Monday, 26 October 2009 — Private Equity (PE) continues to survive and thrive in the Australian market with PE investee companies continuing to outperform public sector counterparts, an Ernst & Young study, Challenges in a new world, shows.
The annual study, released today, reviews about 60% (13) of all 2008 PE exits in Australia and New Zealand with initial investment values of more than A$25 million. This follows on from the 2007 study which looked at 13 or 53% of all 2007 exits.
Ernst & Young Private Equity leader Bryan Zekulich says the study shows PE firms can perform in good times and difficult times.
“The PE model has shown it is resilient and sustainable – it is here to stay,” says Zekulich.
Average PE exits grew annual profit (EBITDA) by 36% compound annual growth rate, compared with 11% for equivalent public companies.
“PE success is based on business fundamentals, creating value from good management. The flexibility of the PE model had been a significant benefit as well – it allows issues to be addressed quickly, so as soon as the slow down hit, PE companies were restructuring, revamping and re-evaluating business models,” he says.
However, Zekulich says that the reduced number of exits in 2008 and increased size of deals in 2006 and 2007 means PE houses are holding large portfolios of high value assets – more than 300 businesses – which will be an issue for the industry in the next few years.
“There is increasing time-pressure to sell them off. If PE doesn’t exit existing investments or create strong cash flows to reduce debt levels, it will have trouble refinancing a significant amount of the debt used to acquire these businesses, much of which matures in 2011-2012.”
The number of PE exits in 2009 is on track to be even lower than in 2008, which means exits will need to increase significantly in 2010 and 2011 to maintain returns to investors and enable future fund raising.
Corporate divestments “perfect for PE”
Zekulich says that on the flipside, PE will be lining up to take advantage of good buying opportunities over the next couple of years.
“The strength of the equity market has meant that the buying opportunities haven’t come up yet, but the sale of non-core or non-strategic assets by corporates is coming and that is perfect for PE,” he says.
“Most listed companies have cleaned out their balance sheets in the past 12 months and now need to grow, sell or buy to increase profitability. They will be divesting poorer performing divisions or areas that are not core business and PE houses have the funds to buy.”
Zekulich says that the days of very large PE buyouts, funded by cheap debt, are gone, but PE still have a lot of “dry powder” they have not yet been able to spend.
“We will see more innovative funding arrangements and strategic partnership between PE houses and corporates.”
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