US private equity giant KKR l is in the midst of trying to take over hospital operator Ramsay Healthcare for A$20 billion. Photo / 123RF
OPINION:
Australia is in the midst of a mergers and acquisitions boom, with private equity firms and pension funds snapping up companies and taking them off the sharemarket.
The M&A boom is good news for the shareholders of target companies, at least in the short-term, but ultimately investors will lose out from having a smaller share market with fewer stocks to choose from.
Some 62 deals valued at over A$50 million ($55.5m) were announced in 2021, up from 42 in 2020 and 41 in 2019, according to figures collated by law firm Gilbert + Tobin in its Takeovers + Schemes Review 2022.
Even more striking still is the total deal value – A$130.5 billion in 2021, compared with A$23b in 2020.
What is unusual about this takeover boom compared with takeover booms in decades past is the involvement of private equity and pension funds including Australian superannuation funds.
In the 1980's, for instance, takeovers were led by swashbuckling corporate raiders, fuelled by debt and ego, who rolled up companies as they built up their own sharemarket listed conglomerates.
The takeovers are being driven by a huge amount of undeployed cash these funds are sitting on. Without them needing to take on bank debt we're not going to see the messy corporate collapses that signalled the end of the good times in the 1980s.
Ultra-low interest rates have also been pushing private equity and pension funds to listed companies over the past few years. Where previously they could have generated an acceptable return from interest payments on bonds and cash, they are having to look further afield for returns, and this includes the listed companies.
Funds are hunting out assets that in some ways mirror the characteristics of bonds – that is, long-term, predictable returns. This means businesses that aren't as hostage to supply and demand as retailers for instance. Instead, the funds are turning their focus to infrastructure providers such as power transmission companies, and airports.
And we've seen all of these sorts of businesses snapped up in the past year ago.
Last year Sydney Airport, power transmission companies AusNet Services and Spark Infrastructure and energy company Tilt Renewables were all taken private.
In fact, Australia is starting to run out of listed infrastructure assets for funds to buy and investment funds are widening their definition of infrastructure to include telecommunications assets such as mobile phone towers and rubbish removal, and we're already seeing these sorts of deals. Macquarie Infrastructure and Real Assets took waste manager Bingo Industries off the market for A$2.3b and a consortium of a superannuation fund and Macquarie bought telecommunications network Vocus Group for A$3.4b.
The other sector coming into the sights of private equity is healthcare, which is also an attractive sector for long-term holders. As the population ages, demand for healthcare is only going to rise, regardless of what's going on with the economy. Additionally, as Asian consumers' incomes increase, they will lift their spending on healthcare.
US private equity giant KKR l is in the midst of trying to take over hospital operator Ramsay Healthcare for A$20b and there will likely be other healthcare deals to come.
If you happen to be a shareholder of one of these companies, you can make a quick profit from the premium bidders have to pay for a takeover.
But ultimately, the wave of private equity and superannuation fund cash will mean a smaller stock market. Retail investors will have less choice about where to place their money and won't get access to infrastructure players and the healthcare sector, missing out on the stable returns and potential growth they offer.
Even as interest rates start to rise, they remain very low by historical standards so Australia's M&A boom isn't likely to slow much this year. And there is still a huge amount of cash looking for a home, both in Australia and from overseas. Australian superannuation funds have A$3 trillion and are increasing their allocations to private equity as they chase better returns.
In fact, already some A$33b worth of private equity deals have been done this year in Australia, eclipsing last year's A$19b, even though we're only halfway through the year, according to data from Pitchbook, a company which tracks private capital markets.
But some asset managers believe the private capital market is headed for a correction.
The chief investment officer of Amundi – one of the world's 10 largest asset managers – said some parts of the private-equity market are beginning to resemble a Ponzi scheme.
Vincent Mortier said in a virtual press briefing last week that the volume of money raised in recent years by private-equity houses had driven up valuations and incentivised firms to buy assets from one another at inflated prices.
"We are in a big bubble in the private markets," he said.
Once private equity firms start to hop off the merry-go-round, some could be stuck with assets for which they have overpaid and prices will fall.