Deals Down Under – Australia in the sights of Global Private Equity

Brief History

Compared to the US and UK private equity (PE) markets, the Australian PE market is relatively immature.  The first venture capital fund was established in the mid 1980s by a pioneering Australian, Bill Ferris, who had studied the US venture capital industry at Harvard in the early 1980s.  The first fund performed well but it was not until the Australian Government set up an Innovation Fund in the mid-1990s offering A$2 funding for every A$1 raised that the venture capital industry got the kick start it needed.

Bill Ferris and his local partner were almost single-handedly responsible for the emergence of the PE market in Australia. As well as establishing the first buyout fund in 1997 in partnership with a New York buyout fund, their spectacularly successful investment of $2.3 M in a search engine called Looksmart received enormous publicity and contributed to the emergence of PE in Australia.  That investment generated a 110 X return in 18 months when the company listed on NASDAQ in 1999. 
Between 2000 and 2010, deal sizes and fund sizes grew exponentially and many of the global private equity titans such as KKR, Carlyle, TPG and Blackstone opened offices in Australia with a view to acquiring large businesses beyond the reach of the smaller newly formed local funds.

Recent Developments

Fast forward to 2021 and there has been a major consolidation of the Australian PE landscape.  Fundraising has become global with Australian institutions seeking global exposure and Australian PE managers having to raise funds offshore in competition with fund managers across the globe. As a result, only the best performing funds have raised new and larger funds in Australia and only a handful of Australian fund managers from the early 2000s are still active and have raised more than eight funds compared to KKR which has just raised its twenty third fund.

As an adviser to Australian and offshore PE funds for 22 years, I have witnessed firsthand the ever- increasing influence of offshore funds in Australia.  Ten years ago, the vast majority of PE deals were by Australian managers investing Australian institutional money.  By 2019,  between 60/70 % of PE investment in Australia came from offshore funds with many adopting the “fly in fly out” model investing from their home base or from regional offices in Hong Kong or Singapore. 
This trend for increased investment by offshore PE in Australia is set to continue for a number of reasons.  In recent years, faced with fierce local competition and high prices in their home markets, US and European growth capital funds, as well as buyout funds, have looked further afield, scouring the globe for investments.  

Australia ticks most boxes for global investors. It has a stable political environment, first rate governance and rule of law, a strong economy and a reputation for technology and innovation.  Add to that, the substantially reduced competition from local funds due to consolidation and the relative weakness of the Australian dollar to the US dollar (currently  AUD$1.00 = US $O.78) compared to historical norms, it is easy to see why Australian deal values have been very attractive to US investors in particular.

Impact of COVID

How will COVID and the lack of international travel impact this trend for increased offshore PE investment in Australia? 

Firstly, Australia has so far fared better than nearly all other first world countries in managing COVID  with only 909 deaths and less than 30,000 infections as at 13 January 2021. The Australian economy has bounced back strongly from the initial lockdowns and so far it has managed to contain the occasional outbreak with relatively little disruption to the economic recovery or businesses.

With international travel almost non-existent since February 2020, the rate of foreign investment has inevitably slowed considerably in 2020 although a number of cross border deals have been negotiated by video conference. Other reasons for the slow down include that  Australia, like many other countries, tightened its foreign investment approval guidelines in 2020 due to national security concerns and concerns opportunistic cashed up foreign investors would take advantage of local businesses reeling from the impacts of the COVID lockdowns.  Foreign investments of all sizes required Government approval from February 2020 until 1 January 2021 when the previous thresholds for approval were restored but new national security measures took effect echoing similar legislative changes in the US and UK. 

With vaccinations being rolled out much quicker than expected, the international airlines are gearing up to substantially increase international flights in the second half of 2021.  With Australia’s decisive handling of COVID further enhancing its attraction to foreign investors, all the indications are that Australia will continue to attract huge interest from cashed up offshore PE funds. 

Consistent with this trend, Norton Rose Fulbright’s highly rated PE team has advised a number of leading US and European buyout and growth funds on Australian investments and has helped identify local investment opportunities for offshore PE clients.

We also track investments by active PE funds in Australia and issue six monthly updates  identifying current PE investments by sector.  These reports have been very well received by offshore PE funds as it gives them a snapshot of future investment opportunities in their preferred sectors.  The latest update has been prepared as at 1 January 2021 and is available by contacting the writer at r.lewis@nortonrosefulbright.com

Richard Lewis is a partner in the Sydney office and leads the firm’s Corporate, Mergers & Acquisitions and Private Equity practices in Australia.