News

By Matthew Nelson, Norton Rose Fulbright

One of U.S. private equity’s biggest challenges is how to deploy the record dry powder it has raised in recent years. Compounding the issue is intense competition for deals in North America, Europe and Asia.

Against this backdrop, Australia presents a unique opportunity.

While U.S. PE firms have been active in Australia, relatively few U.S.-based funds are pursuing the wealth of investment opportunities in the country, a market where they have several advantages.

So why is Australia a land of opportunity for U.S. private equity?

A robust economy and low-risk environment

Australia is entering its 27th consecutive year of economic growth, the only developed economy to achieve this distinction. The Australian economy has outperformed traditional centers of U.S. PE investment in North America and Europe.

Supporting this growth are stable institutions, high productivity and good governance.

Australia has been further helped by its position in the Asia-Pacific region. It has strong ties with Asian countries that highly regard, and have posted sharp demand for, Australian goods and services. As a result, Australian investee companies are well positioned to serve and expand into high-growth Asian markets.

Lower valuation multiples for astute buyout funds

The robust economic climate has encouraged the growth of many successful Australian businesses, which have traditionally obtained investment from domestic sources, including local venture capital and private equity funds.

Compared with the U.S., the competition for Australia’s significant pool of quality assets has been more limited. This has meant that the valuation multiples being paid for Australian targets have been lower than those typically paid on U.S deals.

According to recent studies, the median EV/EBITDA multiple for global M&A deals reached 13.9x in 2017^[1] and 11.5x in the U.S.^[2]. That’s almost double the median multiple of 7.5x on Australian deals^[3].

While the multiple paid depends on the relevant sector and business being acquired, generally lower company valuations in Australia will provide good buyout opportunities for astute U.S. buyout funds that are able to identify the right assets for the right price.

Lower valuations also open doors. Business owners will be more open to listen and share their growth plans with a U.S. PE buyer that may be able to offer more than owners would customarily expect from a domestic buyer.

Availability of credit and lower transaction costs

The availability of credit affects two key drivers of deal performance for PE funds: borrowing costs and the level of equity contribution.

As a basic principle, cheap and freely available credit permits private equity firms to capitalize on more leveraged transactions at lower costs.

This enhances returns on leveraged buyouts and enables PE firms to refinance existing portfolio companies.

Compared with the U.S., Australia is a low-cost jurisdiction for obtaining credit and doing deals.

Borrowing costs in Australia are at record lows, with the Reserve Bank of Australia keeping the official cash rate at 1.5 percent for the past two years.

In contrast, the Federal Reserve has lifted the U.S. benchmark lending rate to 2 percent and expects to increase rates twice more in the next few months, with a further three rises expected next year.

Transaction costs are also lower in Australia, with fees payable to corporate advisers, investment bankers, lawyers and accountants often amounting to as little as half those paid to advisers based in the U.S.

The U.S. dollar compared to the Australian dollar (US$1 = A$1.37) further helps reduce transaction costs and increase profits on acquisitions.

PE-friendly deal terms

PE funds’ participation in M&A transactions is well established in Australia, with many investee companies and business owners being familiar with the private equity model.

This involvement has contributed to the substantial use of warranty and indemnity insurance policies. Australia has become one of the world’s most mature and sophisticated centers for the use of these policies, which facilitate clean exits for PE sellers.

U.S. private equity investors would also be comforted that typical management-equity-incentive structures, deferred-payment models, acquisition structures and price-adjustment terms are principally consistent between Australian and U.S. deals.

In addition, as the U.S. has a free-trade agreement with Australia, investors from the U.S. are subject to a more lenient regime for investing in Australia compared with foreign investors that do not have the benefit of a bilateral free-trade agreement.

With these advantages and opportunities, US private equity funds are well placed to capitalize on the Australian opportunity.

Matthew Nelson is a Sydney-based senior private equity lawyer, specializing in M&A and general corporate and commercial matters, with Norton Rose Fulbright. He can be reached at +61 2 9330 8596 and [email protected].

[1] Dealogic Research, New High for Global M&A Valuation, 25 April 2017.

[2] PitchBook Data, The State of Play for M&A, 3 November 2017.

[3] Grant Thorton, Dealtracker 2017, October 2017.