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Private equity boosts M&A value

Private equity boosts M&A value

Australian private equity (PE) had a strong year in FY2015-16, significantly boosting M&A activity by value, according to a new report from MinterEllison.

Last week MinterEllison launched its Directions in Private Equity Report 2016, revealing that PE boosted M&A value from 4 per cent in FY2014-15 to 20 per cent in FY2015-16.

This is the result of multiple factors, including the lower Australian dollar and low interest rate, as well as the rise of the investment partnership model.

“The [Australian] dollar remains lower relative to many other major currencies, making Australian assets attractive to foreign acquirers. Together with this, an influx in foreign buyers, particularly from China, is resulting in increased competition in particular sectors and asset types, and this in turn is bidding up asset prices for domestic purchasers,” said Ricky Casali, MinterEllison PE partner.

“We expect that this increased competition will force the typically sector-agnostic private equity investor to either pay higher multiples in hot sectors or strategically consider more creative opportunities in alternative sectors.”

The hot sectors of FY2015-16 included aged care, health and allied services, education and child care and technology, according to the report.

Looking ahead to FY2016-17, the report predicted that these three sectors will stay hot, along with experiential (leisure and tourism), turnaround and transformation capital opportunities, and buy and build.

“Home care is the hot trend, with government policy favouring consumer-directed care. This has led to increased interest by PE in allied health services in both the aged care and disability sectors, with the National Disability Insurance Scheme also creating opportunities for PE,” said Mr Casali.

“Favourable government policy with non-means tested child care rebates and benefits and a fragmented industry will continue to drive consolidation.”

MinterEllison private equity partner Glen Sauer noted that PE funds are being increasingly creative to generate value.

“One trend we’re seeing is the 'buy and build' strategy of rolling up related businesses in fragmented markets to create businesses of sufficient scale that are more likely to be exited via an IPO or trade sale,” Mr Sauer said.

MinterEllison also expects PE funds to benefit from larger companies continuing to rationalise by divesting ancillary non-core operations to focus on core assets.

“These 'unloved business orphans' are attractive to PE funds who can provide the necessary resources and capital investment required for them to flourish,” Mr Sauer said.

Looking ahead, MinterEllison sees a strong pipeline of potential PE investments as a result of higher levels of venture capital investment and foreign interest in the Australian market.

“We are in a period of positive increased activity in the venture capital industry and, as a result, we expect that the Australian private equity industry is likely to benefit in the long term,” said Mr Sauer.

“Sectors traditionally attractive to venture capital, such as life sciences and information and communication technology, will continue to grow due to increased capital availability and support, courtesy of the Australian government's innovation agenda, offering PE funds a strong pipeline of potential investments.”

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