Following on from our recent commentary on the opportunities for companies moving from the public to private markets it was interesting to observe the recent involvement of Australian Super, the $170B pension fund, in two bids this year for large ASX listed entities.
In these instances, Australian Super partnered with a private equity firm in offers to take the companies private. Senior portfolio manager Shaun Manuell, in conversation with the AFR, stated that he expected to see institutional investors showing increased interest in such transactions. “We’ve built up a very strong track record of how we see ourselves partnering with private equity.”
However, not all transactions conclude as expected. In the case of the bid for Healthscope the successful transaction went with the US based Brookfield. The bid for Navitas was ultimately successful for Australian Super and BGH. Nevertheless, the process was complex and long-winded, which suggests three points to consider for companies contemplating such a path.
Is the business suited to a private equity transaction?
It’s worth remembering that the goal of investment managers is simple – to ensure the best possible return on capital. While this is not far removed from the obligation on management, the timescales on strategy and outcomes may be quite different.
- PE investors like strong cash-flow businesses – it supports the load that comes from adding debt to leverage the equity invested.
- Businesses which have credible short-term growth opportunities have more appeal. Private equity investors usually seek to realise their investment within 3-5 years.
Ensuring that there is alignment between the business and investor goals is an important prerequisite to a successful engagement.
Do the investors bring suitable capabilities to the ongoing business?
Not all sectors are well suited to private equity investment. Some are inherently more challenging, requiring successful delivery on a wider range of factors. A case in point is the retail sector where historically the performance of acquired businesses has not met expectations. In the USA 25% of the 20 largest retail PE deals since 2005 have resulted in Chapter 11. This is visible not only in the USA but in Australia and other markets.
Retail requires an intense focus on a broad range of measures and despite strong cash flow generally lacks the margins to support costly initiatives such as store footprint expansion.
The level of understanding by the buyer of what it takes to survive, let alone succeed, in such industries should be considered seriously.
How well placed are the Board and management to secure a competitive process?
It’s quite common for a company to receive an unsolicited approach. Sometimes that can be a welcome signal, but in the context of securing the optimal outcome, it is important to be in a position to create a competitive bidding situation, not an easy task as private equity firms seek to secure exclusive opportunities.
Ensuring that the business can effectively respond to and initiate a competitive process is something that needs to be planned for ahead of time. Doing so may require a different skillset from what is presently within the company’s capabilities.
Early planning is key to this approach
Across our global network, we have worked with companies to ensure that such considerations are addressed ahead of time. If you would like to discuss these issues we would be pleased to have a no-obligation conversation.