Private equity gets flexible amid family office competition: PwC

Originally from the Australian Financial Review


Private equity funds are increasingly competing with family offices to provide growth capital or exits for medium-sized business owners, and have become more flexible on their terms as a result, according to PwC’s private clients chief Sanjiv Jeraj.

PwC has modelled that over 350,000 Australian family and privately owned businesses will change hands over the next 10 years as their Baby Boomer stewards sell out or transfer to the next generation.

A full or partial sale to private equity is becoming a popular alternative to a trade sale or appointment of a successor, with almost 90 per cent of all Australian private equity investment in 2016-17 channelled into businesses with an enterprise value of $250 million or less, according to a report from the Australian Private Equity & Venture Capital Association (AVCAL).

A poor impression of private equity as an impatient and expensive form of capital lingered among many business owners, said Mr Seraj, however Australian private equity funds had become more flexible in the face of increasing competition from international funds and family offices over the past decade.

“Once upon a time funds would often insist on 100 per cent ownership of their target, now it’s much more common to take say a 70 to 80 per cent or even a minority position, and allow the business owner to de-risk and then participate in the growth plan,” Mr Seraj said.

The private equity funds were still insisting on protections like drag-along rights, said Mr Seraj, where a majority shareholder is able to force a minority shareholder to join in the sale of a company.


Similar behaviour

But another private equity trope, the three-to-five year time horizon, was being challenged by the increased presence of family offices in the Australian private equity market, which helped its total deal value increase to $5 billion in 2016-17, up from $4.6 billion in 2015-16, according to AVCAL.

“Family offices tend to have a much longer time horizon, more like 10 years, and will often go deep in one industry, and I’m starting to see some of that behaviour mirrored by the private equity funds when they are competing for the same deals,” Mr Jeraj said.

A beneficiary of these trends a decade early was Bede Noonan, whose family-owned engineering firm Geotech sold 82 per cent of its equity to Spanish infrastructure giant Acciona for $197 million last year, helped by a long-running relationship with private equity veteran John Wylie.

Mr Wylie oversaw an 18 per cent interest in Geotech from 2006, in funds whose management changed from Carnegie Wylie to Lazard and finally Mr Wylie’s Tanarra Capital, but whose beneficial owner, industry super fund Sunsuper, never changed.

“Having that private equity holding made us treat the business more like shareholders than we otherwise would have,” Mr Noonan told The Australian Financial Review. “But it was patient capital, at no stage was there pressure on for unsustainable growth.”

The private equity connection brought talent on to Geotech’s board that it could not have interested if it had remained wholly family-owned, such as former Leightons deputy chief executive Dieter Adamsas, Mr Noonan said.

He welcomed the breakdown of the standard five-year time horizons in private equity funds. “Five years has never made sense to me, it doesn’t happen in public equity markets,” he said.

“It makes the case for having a small number of patient, long-term investors like Geotech had with Sunsuper. It’s only when you have lots of individual investors and a few of them want liquidity that the five years gets forced on deals – I guess some people can’t get their head around their money being locked up for longer than that.”