Private Equity Australia: Key Insights and Trends for 2023
Private equity in Australia has become a key player in the country's investment landscape, contributing significantly to the growth of various sectors.
For both local and international investors, this investment instrument offers the opportunity to tap into the potential of Australia's thriving industries.
The private equity ecosystem in Australia is diverse, with numerous firms actively deploying capital in a range of sectors, including industrial companies, financial services, and technology.
Over the years, the Australian private equity market has evolved, witnessing significant deals and adapting to global trends.
As the industry continues to mature and navigate challenges such as geopolitical tensions and the Covid-19 pandemic, it remains focused on meeting Environmental, Social, and Governance (ESG) requirements and driving sustainable growth in portfolio companies.
Fundraising and valuation trends also play a crucial role in shaping the dynamics of the private equity market, as investors and firms alike seek to balance risk and return.
Top Private Equity Firms Australia - Key Takeaways
Private equity is an important player in Australia's investment landscape, contributing to the growth of various industries.
The industry has evolved over time, witnessing significant deals and adapting to global trends, while striving to meet ESG requirements.
Fundraising and valuation trends play a crucial role in shaping the private equity market dynamics in Australia.
Overview of Private Equity in Australia
Private equity (PE) in Australia has been evolving over the years, with an increasing number of investors seeking diverse opportunities from a broader range of asset classes.
The market has shown resilience amidst economic disruptions such as the COVID-19 pandemic, and is expected to continue growing.
Australasian PE funds predominantly favour buyouts, which saw buyout funds representing 23% of the funds closed and 62% of the total private capital raised in the 2021 financial year.
International investment has grown stronger, contributing to the funds' performance.
Fundraising in the Australian private equity market has become competitive in recent times.
While PE revenue is estimated to have declined by 3.5% in 2020-2021 due to the pandemic disruptions, it is projected to grow at a rate of 2.6% in the coming years, reaching $725.3m by 2025-26.
Investments in the Australian PE market span across various sectors, including technology, healthcare, financial services, and consumer products.
Innovative companies with high growth potential and established businesses with potential for operational improvements are among the top targets of private equity firms.
In order to participate in the Australian private equity market, investors typically involve institutional players such as pension funds, insurance companies, and sovereign wealth funds.
Individual investors can also invest in private equity, albeit through limited partnerships or other investment vehicles.
Overall, the Australian private equity scene is a vibrant and dynamic space, offering multiple opportunities for growth and value creation for both businesses and investors.
Australia's Investment Landscape
Australia has experienced significant growth in the private equity market in recent years.
The assets under management (AUM) for Australia-focused private capital reached $118 billion in September 2022, marking a 21% increase from $98 billion just nine months prior.
This growth is primarily attributed to foreign investment, driven by Australia's stable economic conditions, strong business environment, and increasing opportunities in various sectors.
One major driver of the increase in private equity investment is the expanding range of investment opportunities.
Industry assets under management reached a record $90 billion in June 2021, up 11% from $81 billion in December 2020, and 42% higher than $64 billion in December 2019.
This is mainly due to Australian businesses seeking alternative finance sources and the shift in investment focus towards industries with high growth potential such as healthcare, technology, and renewable energy.
Environmental, social, and corporate governance (ESG) risks are playing a crucial role in the private equity landscape in Australia.
Investors are increasingly emphasising the integration of ESG factors in their investment decision-making process, and as a consequence, businesses with strong ESG practices are attracting more deals.
This shift in focus is not only creating new investment opportunities but also driving businesses to incorporate sustainable and responsible practices in their operations.
The private equity market in Australia also contributes significantly to the nation's economy, with an estimated annual turnover of $63.5 billion.
This market supports employment for over 512,000 full-time equivalents and adds approximately $58 billion in total value to the Australian economy.
The strong performance of private equity investments enhances the competitiveness of Australian businesses and very likely fuels further growth of the private capital market.
Australia's investment landscape is currently being shaped by the ongoing pandemic, climate change action, and higher inflation.
These forces are driving a shift in investment preferences from traditional sectors such as fossil fuels and office retail towards emerging opportunities in logistics, transition finance, and growth industries with sustainable practices.
This changing landscape requires investors and businesses in the private equity market to continuously adapt and seize new opportunities to thrive.
Role of Private Equity
In the Australian market, private equity plays a significant role in providing investment capital to companies looking for growth and long-term value creation.
This type of capital comes from high net worth individuals, institutional funds, or equity firms, which invest in both private and publicly listed companies with the aim of attaining control and pursuing operational strategy to generate positive returns on the investment.
Private equity firms in Australia manage an estimated $63.5 billion annually, making a considerable contribution of around $58 billion in total value added to the economy, along with employment for 512,000 full-time equivalents.
Recent years have seen a growth in private equity-backed buyout deals, reaching a record of AUD 20.1 billion, a 32% increase year-on-year, and 20% higher than in 2019.
Portfolio companies are the primary target of private equity investments.
These companies benefit from the influx of capital, strategic expertise, and vast network of industry connections provided by the private equity firms.
In turn, the firms work closely with the management teams of these companies to develop and implement strategies that drive long-term growth and enhance overall efficiency.
One of the key aspects of the private equity approach is its commitment to long-term growth.
Unlike traditional short-term focused investors, private equity investors remain focused on a company's growth prospects and operational improvements over several years.
This long-term perspective enables them to make informed decisions that can create lasting value for both the portfolio companies and the investors themselves.
Overall, the role of private equity in Australia is crucial in nurturing the growth of businesses and the economy as a whole.
With the aim of delivering long-term value creation, private equity firms provide access to both capital and strategic expertise, supporting businesses on their journey towards becoming strong and sustainable entities in their respective industries.
Private Equity Australia Guide
Key Sectors for Investment
In recent years, the private equity landscape in Australia has experienced rapid growth and diversification. Among the key sectors attracting significant investment, five industries stand out: healthcare, real estate, technology, infrastructure, and consumer.
The healthcare sector has been a significant focus for private equity investments in Australia, driven by a stable regulatory environment, an ageing population, and increased demand for medical services and technologies. T
his sector presents various opportunities for investment, ranging from medical devices and pharmaceuticals to aged care facilities and diagnostic services.
Examples of successful private equity transactions in this space include the acquisition of iNova Pharmaceuticals and the growth in primary care providers.
Real estate investments have also garnered interest from private equity firms in Australia, with a focus on commercial, residential, and industrial properties. The attraction to this sector lies in the country's strong economy, population growth, and increasing urbanisation.
Investors have been particularly active in acquiring office buildings, retail centres, and logistic assets, capitalising on positive market trends and creating additional value through active asset management and redevelopment.
In the technology sector, Australia has been experiencing a surge in venture capital investments, focusing on innovative start-ups and high-growth technology companies.
Particular attention has been given to fintech, edtech, e-commerce, and software-as-a-service (SaaS) industries, with private equity firms actively pursuing deals and partnerships.
The rapid growth in the technology space has been supported by favourable government initiatives, as well as a highly skilled workforce and a strong desire for digital transformation across businesses.
Infrastructure investment is another core area for private equity in Australia, with a focus on transport, energy, and utilities assets.
Infrastructure projects have been bolstered by the government's substantial spending on building essential infrastructure, aimed at promoting economic growth and increased connectivity.
Private equity has played a critical role in funding and partnering with various organisations involved in infrastructure projects, including public-private partnerships (PPPs).
Lastly, the consumer sector has seen considerable interest from private equity investors, targeting businesses in industries such as retail, food and beverage, and consumer goods.
The consumer market offers significant potential for growth and consolidation, as well as opportunities for operational improvements, strategic acquisitions, and digital integrations.
In conclusion, these five sectors have showcased the potential for robust private equity investment opportunities in Australia.
Their competitive landscape, favourable market conditions, and strong growth potential make them attractive avenues for private equity firms looking to deploy their capital.
By focusing on these key industries, private equity firms can capitalise on the various opportunities that Australia's diverse and thriving market has to offer.
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Significant Private Equity Deals
In recent years, Australia has seen a surge in private equity activity, with numerous significant deals taking place. One noteworthy transaction involved the Sydney Airport, acquired for $23.6 billion by the Sydney Aviation Alliance.
Another remarkable deal was the $3.4 billion acquisition of Uniti Group Limited by HRL Morrison & Co, Brookfield Asset Management, and Commonwealth Superannuation Corporation.
Pacific Equity Partners also played a crucial role in these transactions.
Private equity-backed mergers and acquisitions (M&A) targeting Australian companies have reached a record $40.1 billion in the first five months of the year, demonstrating the sector's impressive growth.
The increase in M&A activity is largely due to the deployment of private equity dry powder, along with a substantial amount of Australia's super funds.
One of the most publicised private equity deals in Australia involved Virgin Australia and Bain Capital. In 2020, following the airline's financial struggles due to the COVID-19 pandemic, Bain Capital acquired Virgin Australia.
The acquisition aimed to simplify the airline's operations and further enhance its competitiveness in the market.
The strong private equity activity in Australia is generating a positive outlook for the sector, with increased fundraising and returns observed.
The vigorous market signals a promising future for private equity investors and Australian businesses seeking capital for growth and expansion.
Private Equity versus Venture Capital
In the Australian financial landscape, both private equity and venture capital play crucial roles in providing funding for businesses.
While these terms are related, it is essential to understand the fundamental differences between the two investment strategies.
Private equity is a type of investment that focuses on providing capital to established, mature companies in exchange for a portion of the ownership.
Investors in private equity firms often pool their resources to support these businesses, which may need funding for various reasons, such as expansion, restructuring, or improving operational efficiency.
Typically, private equity investments are made with a medium- to long-term horizon, as these businesses are expected to generate returns over several years.
On the other hand, venture capital targets startups and young businesses that may not have established revenue streams nor product-market fit.
These businesses are often in their seed or early-stage phase, with founders and CEOs aiming to attract investors by presenting a minimal viable product or proof of concept.
Venture capital firms usually categorise their investments into rounds such as Seed, Series A, Series B, and so on, and each round involves a higher degree of risk and potential reward.
It is crucial to note that venture capital is considered a type of private equity, as both investment strategies focus on investing in privately held companies.
Both private equity and venture capital have a significant presence in Australia, with approximately $30.3 billion of capital raised to date.
The Australian Investment Council provides industry updates and insights into the performance of Australian private equity and venture capital firms.
While these two investment strategies appear similar, they differ in terms of risk, returns, and investment goals.
Private equity typically seeks steady, predictable returns through mature businesses, whereas venture capital aims to identify high-growth companies with the potential to generate substantial returns, albeit with more significant risks involved.
Trust is an important factor for both private equity and venture capital investments. Investors need to have confidence in the management and decision-making abilities of the CEOs and founders they support.
Both investors and investee companies rely on trust to ensure mutually beneficial relationships that lead to successful outcomes.
In conclusion, private equity and venture capital are distinct yet related investment strategies within the Australian financial landscape.
By understanding the unique characteristics and goals of each approach, investors can make informed decisions to achieve the best possible outcomes.
Effect of Geopolitical Tensions and Covid-19 Pandemic
The Covid-19 pandemic has had far-reaching implications on various industries across the globe, including the Australian private equity market.
The immediate effects of the pandemic include lower returns from short-term securities investments and difficulties in further reducing deposit rates due to already low levels .
Alongside these immediate consequences, a longer-term issue emerging is the likely rise in bad debts, which may impact bank capital and affect the private equity landscape.
Geopolitical tensions, particularly the strained relations between Australia and China, have also played a role in shaping the private equity environment.
The interruption of international student flows, coupled with growing tensions in the Indo-Pacific region, has contributed to uncertainty in the market .
As a result, risk management emerges as a critical aspect for private equity investors and stakeholders.
In this challenging context, private equity dry powder (unused capital available for investment) in Australia is at historically high levels: as of 30 June 2021, it was at USD $11.5bn, although slightly down from USD $11.8bn at December 2020.
Increased inflows of dry powder can be both an opportunity and a challenge for private equity firms. It presents opportunities for investment, yet also raises concerns about finding suitable deals and managing inflationary pressures in an era of market volatility.
The Covid-19 pandemic has not only affected lives and livelihoods, but it has also triggered civil unrest, heightened economic inequality, and increased geopolitical tensions.
This complex interplay of disruptions adds further layers of intricacy to the Australian private equity market.
Therefore, investors and stakeholders must navigate this environment with heightened awareness of both immediate and long-term consequences.
In summary, the Australian private equity landscape is being shaped by the dual impact of the Covid-19 pandemic and geopolitical tensions.
As the industry grapples with issues such as rising bad debts, inflationary pressures, and the effects of strained international relations, risk management and adaptability will be key factors for success in this evolving market landscape.
Compliance with ESG Requirements
The importance of Environmental, Social, and Governance (ESG) factors in the private equity industry is growing rapidly.
Private equity firms in Australia are increasingly prioritising ESG criteria when making investment decisions, both as a matter of ethical responsibility and to mitigate risks and create value in their portfolios.
A key aspect of ESG compliance within private equity is the development and implementation of an effective ESG strategy.
Firms such as Deloitte Australia offer advisory services that assist businesses and acquisitions in crafting their ESG strategies. This support ensures alignment with industry best practices and regulatory standards.
In addition to developing an overarching ESG strategy, private equity firms in Australia must address specific ESG issues within their investment portfolios.
For instance, they need to demonstrate a commitment to sustainable practices, which encompasses reducing their carbon footprint, sourcing materials ethically and responsibly, and ensuring supply chain sustainability.
Furthermore, a strong focus on social considerations is vital. This includes promoting diversity and inclusion within their workforce, respecting human rights, and engaging with local communities to deliver positive social impacts through their investment decisions.
Effective governance structures play a crucial role in achieving ESG compliance as well.
Private equity firms must adopt transparent reporting practices that demonstrate an understanding of their ESG-related risks, and implement policies and procedures that mitigate them.
Proper due diligence processes, as well as risk management and monitoring systems, should be in place to ensure ESG objectives are being met and are closely aligned with corporate goals.
Recent reports, such as EY's article on harnessing the ESG premium, reflect the growing trend for private equity firms to capitalise on ESG value creation.
By adopting responsible investing practices, these firms can enhance their brand reputation, attract more capital, and ultimately drive business success.
Overall, private equity firms in Australia must actively engage with ESG issues to ensure compliance and navigate the evolving landscape of ESG requirements.
By emphasising sustainable practices, prioritising social considerations, and strengthening governance structures, these firms can successfully integrate ESG into their investment strategies and deliver long-term value to their stakeholders.
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Fundraising and Valuation Trends
In recent years, the Australian private equity (PE) market has witnessed robust growth, benefiting from strong fundraising conditions and high valuations.
According to the BDO's 'Private Equity in Perspective' Report 2021, fundraising has reached historic highs, driven by robust investor interest, multifaceted financing options, and readily available debt financing.
Valuations in the market have remained elevated due to increased competition among investors, as well as the presence of more cash-rich PE firms with significant cash reserves.
This abundance of available capital allows firms to price deals more aggressively, leading to higher valuations for businesses that are attractive acquisition targets.
As a result, some investors may need to adopt more disciplined approaches to investment valuations, pursuing only those deals that align with their core competencies and value creation strategies.
In terms of returns, the Private Equity in Review 2021 report highlights that PE returns are performing well. High-quality assets coupled with strategic value creation plans have contributed to competitive performance across the PE sector.
The trend of consistently strong returns has made the Australian PE market an attractive destination for investors seeking stable, long-term yield.
Moving forward, some of the key takeaways for the Australian private equity market in 2023 include:
Continued strong fundraising and high valuations will likely sustain the competitive landscape among investors.
The trend of robust investor interest in PE funds will likely further contribute to the growth of the market.
As valuations remain elevated, investors will need to focus on deal structuring and value creation to achieve attractive returns.
In conclusion, the Australian PE market has been experiencing favourable conditions in areas such as fundraising, valuations, and returns.
With the continuing trends of abundant capital, elevated valuations, and strong investor interest, the market is set to remain vibrant and highly competitive in the coming years.
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Evolution and Future of Private Equity in Australia
The Australian private equity landscape has undergone significant transformations in recent years, adapting to various emerging trends to tap into new investment opportunities.
One noticeable change is the growing focus on infrastructure assets, with the top five deals in FY21 accounting for 66% of the total deal value in the sector source.
Furthermore, the market saw year-on-year growth, with deal volume rising from 124 in FY20 to 134 in FY21.
Digitisation is playing a critical role in shaping the future of private equity in Australia, as firms utilise technology to enhance operations, streamline processes, and identify lucrative investment opportunities.
Embracing digital advancements not only improves the efficiency of deal-making but can also accelerate the growth and scalability of portfolio companies.
Increased competition within the sector has meant that firms need to differentiate themselves to remain successful in the market.
As at June 2023, there was USD 14.8bn of dry powder in the Australian private equity market, reflecting the significant appetite for investment source.
To stay ahead of rivals and secure the most attractive deals, private equity firms must demonstrate value beyond the provision of capital, providing strategic guidance and support to businesses to optimise performance.
In light of the current market dynamics, expert advisors are becoming increasingly important for private equity firms. Employing the right advisors can significantly impact deal sourcing, due diligence, and portfolio management.
With the average age of the Australian population rising, healthcare has emerged as a popular sector for private equity investments. Over the last 12 months, the sector saw an increase in investment value from 6% to 10% source.
Given the evolving nature of the Australian private equity landscape, it is essential for firms to stay informed, continuously adapt, and strategically position themselves to capitalise on emerging trends.
Confidently navigating digitisation, facing increased competition, collaborating with expert advisors, and considering the impact of demographic shifts will be fundamental to securing success in the market.