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Australian private equity rebounding but must adapt

Australian private equity rebounding but must adapt to new environment

Offshore interest the new deal driver as industry prepares for AVCJ Australia & New Zealand Forum

For Immediate Release

Sydney, 23 February 2012 - Australian private equity is showing promise for the year ahead but the sector will need to look for new opportunities, including moving offshore to source funding and tapping into lucrative Asian growth markets, say participants in the annual AVCJ Australia & New Zealand forum on private equity and venture capital, to be held in Sydney in March.

Private equity and venture capital funds raised US$2.3 billion in Australia in 2011, a 72% increase over the previous year - but most of this came from just three funds, according to AVCJ Research. With this subdued local appetite, general partners are increasingly looking for new sources of funding, in particular overseas investors who now account for almost half of new funds raised.

Peter Wiggs, managing director of Australian private equity firm Archer Capital, said Australia was well positioned globally and that he felt optimistic about where the industry was headed in the next 5-10 years.

"Australia's economy is different to virtually any other Western economy in terms of its growth, employment, sovereign balance sheet and banking system, which is a pretty good place to start. The sources of capital will change across time, but if you have a good track record you'll be successful in raising money," he says.

Offshore funding growing as new deals look to Asia

Australia has become an increasingly popular choice for global private equity investors over the past decade, while local institutions have in recent times started to pull back from the asset class. This is most visibly demonstrated by the ongoing debate about fees, recently stoked by The Cooper Review, which has seen some superannuation funds say they will reduce private equity allocations.

These factors have contributed to a growing trend of Australian PE firms turning to offshore investors. According to Wiggs, the foreign share of Archer's funds has steadily increased over the years and it accounts for the majority of the most recent vehicle's corpus. Stuart Wardman-Browne of CHAMP Ventures said last September that his firm is tapping offshore investors for the first time.

"Private equity is going through a period of repositioning with Australian institutional investors," adds Tim Burroughs, managing editor of AVCJ. "Despite efforts to demonstrate a more measured approach to leverage and pricing, many superannuation funds are exiting illiquid assets such as private equity all together. This has left many private equity funds turning towards offshore investors."

Changes in the fundraising environment are matched by those regarding investments and exits. Increased interest in Australasian assets, ranging from mining to agriculture to consumer brands, from investors in Asia has made private equity firms reassess their strategies.

Affinity Equity Partners' acquisition of Primo Smallgoods is just one example of recent investments in the food space - made in the knowledge that emerging Asia is looking for ways to meet growing consumer demand. Pacific Equity Partners' exit of Manassen Foods to Bright Food Group is another indication of the power of Chinese trade buyers, in this case one looking for geographical diversification and industrial expertise.

With the IPO market struggling and private equity firms carrying a lot of assets on their books, secondary buyouts are also on the rise as investors look for an exit. For some, particularly those in the still underperforming retail space, economic difficulties are already taking their toll, prompting a spate of debt restructuring.

"It is a reminder that the investment climate is far removed from that of 2006 and 2007, a period in which there were many overpriced and highly leveraged deals," says Burroughs. "Economic uncertainty has also pushed private equity firms into sectors that are perceived as more defensive, notably Archer Capital's purchase of fast food firm QSR."

Industry heavy hitters to gather for private equity event

The industry will gather in Sydney on 7-9 March in Sydney for the 9th Annual AVCJ Forum Australia & New Zealand 2012 to discuss the future for the private equity sector. Last year's event was attended by 250 of the industry's leading names from limited partners, general partners and other industry professionals.

"We look forward to the conference and the chance to share our views and discuss the industry's most pertinent topics and challenges. The Australian market has strong fundamentals and it remains an attractive target for private equity, but there are likely to be some challenges in the months ahead that will require careful negotiation," says Allen Lee, publisher of AVCJ.

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