Private equity goes Downunder

Private equity firms are investing funds in Australian companies at a record rate but competition to sign deals is spurring late entrants to carve out niche areas in booming parts of the economy such as resources.

Buyout firms have flocked to Australia in recent years lured by 15 years of economic growth, stock markets near record highs and transparent rules and regulations.

The influx has swelled the ranks of bidders for Australian assets and is slowly ratcheting up prices to an average 7 time to 9 times core earnings, from 5 times to 7 times about three years ago.

Buyout firms, which typically snap-up undervalued companies, restructure the business and sell them usually three to five years later at a premium, are searching for a new twist in the tale.

"We have already been approached by Japanese companies who are interested in teaming up with us to invest in Australia," said Hirofumi Hirano, chairman of buyout firm Nikko Principal Investments which opened an office in Australia this year.

"This is a niche area that we are particularly suited to fill. We are particularly interested in cash-flow generative companies in the resources sector."

Japan was Australia's largest export market last year. Australia is the world's biggest exporter of coking coal, the No 2 for steaming coal, gold and uranium, and the third-largest exporter of aluminium and iron ore.

An auction for two non-core assets being sold by Brambles Industries - final bids were due yesterday - illustrates the degree of competition.

Contenders read like a Who's Who of the business: Australia's Champ Private Equity, CCMP Capital Asia, Kohlberg Kravis Roberts and Ironbridge Capital, which has teamed up with CVC.

"In our view, the key is finding a unique opportunity or angle, whether that be via an auction or private sale. Otherwise you run the risk of the winners curse of simply paying the highest price," said David Jones, Champ executive director.

Analysts have valued Brambles' Australian Cleanaway business at about A$600 million.

Champ and Transpacific, which recently merged with Waste Management NZ, have said they are interested in Cleanaway and the Brambles Industrial Services arm in Australia, saying they represented the "logical acquirer" of the assets.

New entrants in Australia's market cite the potential for private equity to grab an even higher percentage of merger and acquisitions action.

In the United States and Europe private equity accounts for about 21 per cent of merger and and acquisitions action while in Australia it is about 9 per cent, according to financial data provider Dealogic.

The news is good for the dealmaking machine of bankers, lawyers and accountants that has clustered to service the funds. They take up to 5 per cent in fees on transactions.

Bankers, for example, are reaping fat fees - US$17.1 million from 43 deals so far in 2006, up from US$16.5 million in the same period last year. The top banks chosen by financial sponsors are Citigroup, Deutsche Bank and UBS, Dealogic said.

One of the main attractions for funds setting up shop in Australia is that investors seem keen to fund deals.

So far this year, funds raised for Australia rank second in Asia at US$1.62 billion, behind Hong Kong with US$2.44 billion, said researchers at Hong-Kong based AVCJ.

Local fund Ironbridge is raising an A$800 million fund and peer Catalyst A$300 million, according to industry sources.

Money is being put to work at a record clip, with US$2.18 billion invested so far this year, near double last year's amount.

TPG Newbridge bought the Myer department store chain for A$1.4 billion.

But, it's not all plain-sailing.

Bankers note there is less onus on companies' management to sell to private equity than, say, in the United States where boards have been sued if they do not accept an attractive offer.

Also, the natural targets of private equity tend to be the third or fourth ranked group in a sector, which in a country of just 20 million people may have a small customer base.

But pulling profits from the world's eighth-largest stock market to return to investors has been relatively easy to date.

"Investors have been comfortable seeing private equity funds sell their whole stake in a business, whereas in other markets around the world they generally have to keep big chunks of the equity," said Peter Brownie, a managing director in Morgan Stanley's investment banking division in Sydney.

- REUTERS