Private equity gears up for a deal fest Down Under

InvoCare

11/07/2023 02:09

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own. Refiles to add link.)
    By Antony Currie
       MELBOURNE, July 11 (Reuters Breakingviews) - Australians
are a sports-mad lot. So it’s fitting that one of the country’s
most hotly contested deals involving overseas private equity
firms is for Rugby Australia. CVC Capital Partners and Silver
Lake are just two of the seven players, reports the Australian
Financial Review, trying out to join the ownership team of the
game’s national governing body. It’s an unusually competitive
battle in a slow year for financial sponsors. It’s also a teaser
for the deal fest buyout shops are gearing up for Down Under.
    Brookfield Asset Management  BAM.N   BAM.TO  is already well
established, with Oceania accounting for some $60 billion of
assets it manages - more than half of its Asia Pacific region.
Another veteran, Blackstone  BX.N , has doubled its private
equity headcount over the past couple of years. CVC returned to
the country in 2021, nine years after losing $1.8 billion when
television network Nine Entertainment, which it bought just
before the financial crisis, went bankrupt. EQT now has around
50 staff just three years after setting up shop. 
    The draw is a similar level of transparency and rule of law
they’re used to in Western markets that can be harder to find in
Asia. Another national obsession, the property market, is shared
by buyout shops, too. There are infrastructure and energy
transition opportunities – like Brookfield’s $13 billion 2021
buyout of power transmission company AusNet Services and its
pending $12.5 billion acquisition with MidOcean Energy of Origin
Energy  ORG.AX . And in some respects Australia is almost a safe
proxy for China given the People’s Republic is by far its
largest trading partner.
    The economic slowdown should provide plenty of new targets.
Commercial real estate is one area: pension funds
AustralianSuper, Australian Retirement Trust and Cbus, reduced
their property portfolio’s book value by up to 15%. Consumer
companies will be under pressure, too, as accumulated savings
deteriorate and spending slows.
    All that gives Australia a chance of regularly accounting
for as much as 40% of financial sponsor deal volume annually in
Asia Pacific, one senior banker tells Breakingviews. 
    That has only happened once of late, in 2021, when some $68
billion-worth of deals were struck, led by large transactions
like the $22 billion club deal for Sydney Airport. Usually, Down
Under’s representation is in the teens; so far this year, at
$2.8 billion, it’s just 6%, per Dealogic.
    With $676 billion of private equity dry powder in the
Asia-Pacific region, according to consultancy Bain & Co,
regularly capturing a two-fifths share implies up to $270
billion of capital could be heading Down Under in the coming
years. 
    There are some hurdles to clear, though. The downturn is
probably only in its early stages, with the pain from the
4-percentage-point increase in interest rates over the past 14
months yet to flow through. And chances are central banks will
add to that by raising interest rates again to fight inflation,
despite the Reserve Bank of Australia last week and the U.S.
Federal Reserve last month eschewing a hike. Meanwhile, rising
government bond yields signal chances of a recession in the
country are increasing.
    That increases the risk of buyers trying to catch the
proverbial falling knife. Deals with relatively stable earnings
are less risky, like TPG’s $1.9 billion pursuit of
funeral-services provider InvoCare  IVC.AX . Rugby Australia
falls into that category, too, thanks to sticky ticket sales, TV
rights and merchandise.
    But most are likely to wait for rates and inflation to peak
and for potential targets’ shares to fall further. That might
not be too far off: RBA watchers are predicting no more than a
couple more 25-basis-point hikes over the coming months. By then
it’ll be close to the southern hemisphere summer and the start
of the retail sector’s all-important holiday season – an ideal
time for buyout barons to gauge how much monetary policy has
affected the economy.
    That means there should be plenty of hard-fought M&A brawls
in early 2024 between more and better resourced overseas buyout
firms and strong domestic players from Macquarie Capital to the
larger pension funds. By then there’s also a good chance the
leveraged loan and term loan B markets that help finance LBOs
will be properly open again.
    That risks setting up the same playing conditions CVC’s
erstwhile regional senior partner Brian Hong complained of when
discussing the Nine Entertainment fiasco. Australia, he said,
was too small and too competitive for private equity firms to
make money. Those now warming up on the side lines must hope the
rematch will be a wholly different affair.
    
    Full view will be published shortly.
    Follow @AntonyMCurrie on Twitter

      
    
 

 (Editing by Robyn Mak and Thomas Shum)
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