More than 40 WA businesses have partnered with private equity funds in recent years.
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CAFE chain Dome Coffees, mining contractor Barminco and Chicken Treat fast food chain have used it for years.
Engineering group Calibre Global, fuel services company Fuelfix and Gull Petroleum started using it last year.
Farming group Wellard started using it this year and will likely be followed by Brownes and Alinta Energy.
The ‘it’ is private equity, a sometimes-maligned source of capital that has proved to be surprisingly popular among Western Australian businesses.
Right now, there is a steady stream of private equity fund managers flying into Perth from Sydney and Melbourne, joining the handful of local funds looking for businesses to buy into.
Should local businesses listen to the critics who deride private equity funds as rapacious Wall Street-style villains, buying on the cheap and using financial engineering to deliver high returns to their investors?
Or do the private equity funds offer growth opportunities, via capital and managerial expertise that would otherwise be out of reach for local businesses?
What about the third option? What if the smart boys from the east aren’t so smart?
The recent failure of REDGroup Retail, which owned the Angus & Roberston and Borders book chains, showed that private equity backing is no guarantee of success.
Then there are examples like Myer, which was hugely profitable for its private equity owner TPG Capital but has performed poorly for the investors who participated in its stock market float.
Hence the common warning, never buy anything private equity is selling.
But what about business owners who are thinking about jumping into bed with private equity?
Jeminex, an industrial supply business put together by AMP Capital Investors, provides a cautionary tale.
Starting in 2005, AMP Capital went on a buying spree during which it bought more than a dozen businesses in loosely connected industries, including Perth businesses Heatley Sales, Worksense, Network Packaging, Bri-Tech and Noble Agencies.
AMP bundled the businesses into Jeminex, hired Wesfarmers executive Mark Allison as chief executive and readied for a stock market float in 2007, which would have paved the way for the vendors to exit.
Four years on, the stock market float still hasn’t happened, Mr Allison has gone, AMP has sold its private equity business to CHAMP Ventures, and the Jeminex board, including Heatley Sales founder Geoff Heatley, has spent the past two years restructuring its under-performing businesses.
Growing deal flow
While private equity funds may have a chequered performance history, it is clear that they are back in business in a big way.
After a quiet 2008 and 2009, there has been a jump in the number of completed deals, particularly during the past six months.
The turning point for the sector was the $2.7 billion acquisition of Healthscope, which among many other assets owns The Mount Hospital in Perth.
The key to this deal, like many private equity transactions, was not just the equity put in by The Carlyle Group and TPG Capital.
To succeed, it also needed banks to contribute debt funding; and it appears the banks are coming to the party.
In WA, seven private equity managers – Standard Chartered Private Equity, Archer Capital, Catalyst Investment Managers, Next Capital, First Reserve Corporation, and local firms Banksia Capital and InGlobo Asset Management – have completed deals over the past year.
They join more than a dozen other funds that have invested in WA, including Wesfarmers-backed Gresham Private Equity, Resource Capital Funds, CHAMP Ventures, Paragon Private Equity, Navis, Quadrant Private Equity, Ironbridge Capital and Harmony Capital. Local firms in the private equity sector include Viburnum Funds and Dorado Capital, which are helping to fill the gaping hole left by the wind-down of pioneering WA investor Foundation Capital.
Catalyst moves west
The private equity sector’s growing appetite for WA investments has been highlighted by Catalyst Investment Managers’ decision to open a Perth office.
Perth expat Aaron Hood, who has been with Catalyst since 2004, will be heading up Catalyst’s Perth office with support from local business executive Anthony Wooles, who will work with Catalyst in tandem with his own business AEW Capital.
The two came together last year when Catalyst planned to invest $23 million to recapitalise Mr Wooles’ company Pearl Street. That proposal was trumped by a takeover offer by listed company Campbell Brothers.
The opening of Catalyst’s Perth office also follows its purchase of a majority shareholding in Perth-based candle and fragrance retailer Dusk Australasia.
Mr Hood said the Perth move reflected the strong deal pipeline in WA. During the past two years, about 30 per cent of the investment opportunities Catalyst had identified were in WA.
With a preferred deal size of $20 million to $85 million, he anticipates Catalyst will fill a market opportunity not covered by the local firms.
“Being on the ground and getting close to management and the advisers, we hope to become the preferred partner,” Mr Hood told WA Business News.
Mr Wooles believes Catalyst’s move, and the keen interest in Perth shown by other private equity funds, signals the city’s growing maturity.
“It’s not a flurry, it’s a sign of Perth growing up,” he said.
Archer gets active
The most active investor in WA has been Archer Capital, which in an extraordinary run has backed three major WA acquisitions – Brownes, Gull Petroleum and Fuelfix – in the space of just a few months.
The Brownes deal, announced last October, has proved to be the most contentious.
It was due to settle at the end of January, but that date has been pushed back to March 20, a spokesman for current owner Fonterra told WA Business News.
The delay has not been officially explained but is assumed to be linked to the milk price war, which has put a question mark over profit margins in the dairy processing industry.
The Brownes deal was a prime example of the private equity sector’s ability to take advantage of opportunities.
The business is profitable and has strong regional brands but does not fit with current owner Fonterra’s focus on national markets.
Archer executive Justin Punch said the attraction was WA’s high-growth economy, vibrant dairy market and Brownes’ market-leading positions.
“We look forward to providing Brownes as a standalone entity with the resources and backing it needs to develop and grow,” Mr Punch said.
The Gull purchase illustrated the way in which private equity funds often acquire one business and use it as a vehicle for industry consolidation.
Gull’s buyer was independent fuel company Ausfuel, which was founded 25 years ago in the Northern Territory.
AMP took a majority shareholding in Ausfuel in 2003 and was replaced as major shareholder by Archer last year.
As the new owner, Ausfuel said it planned to continue operating Gull as a stand-alone business focused on WA.
A similar strategy has been employed by Next Capital, which in 2007 acquired a 60 per cent shareholding in Onsite Rental Group.
Since then, Onsite has made several acquisitions, most recently the $70 million purchase of WA firm Statewide Equipment Hire. That made Onsite the second largest equipment hire firm in WA.
Archer’s third WA investment also involved buying out an existing investor.
It has become a major shareholder in Geraldton-based fuel management business Fuelfix, which had previously been backed by James Packer’s Consolidated Press.
Another big investor in WA is Standard Chartered Private Equity, which has agreed to pump $83 million into agribusiness group and livestock exporter Wellard.
The investment is designed to help Wellard pursue growth opportunities in its livestock and grain production, trading and distribution business.
“The partnership with Standard Chartered provides an even greater capital base to invest in businesses, assets and a larger marketing footprint to achieve (our) goal,” executive chairman Mauro Balzarini said.
As part of this deal, Standard Chartered has also been appointed as Wellard’s global banking provider.
Local players
Operating on a smaller, local scale is Banksia Capital, set up by former Foundation Capital and Navis executive Mark Dutton.
Banksia targets investments in the $3 million to $15 million range, similar to another local firm, the Wyllie family backed Viburnum Funds.
“Groups like us are set up to be on the ground, to be hands on,” Mr Dutton said.
He believes there are plenty of firms servicing Perth on a fly-in, fly-out basis and chasing larger deals, but very few targeting smaller, locals deals.
Banksia has completed three transactions, including for Jonathan Huston’s Croissant Express and for Keith John’s debt collection group Pioneer Credit.
Viburnum’s most recent transaction was a 2008 investment in Dome Coffees, which had previously been backed by Navis.
Lapsed ventures
The paucity of local private equity capital does not make it easy for new entrants to the market.
In recent years, at least three groups have endeavoured to establish private equity funds.
Former Ernst & Young partner Lui Giuliani headed up Primewest Capital, with backing from the directors of property syndicator Primewest Management, John Bond, David Schwartz and Jim Litis.
Norton Rose partner Derek La Ferla had a lead role in Newstream Group, which was backed by NRW Holdings founder Jeff McGlinn, while GRD founder Brettney Fogarty sought to establish Third Man Capital as a player in the market.
These groups made some investments but not enough to build a lasting business.
What to look for
Mergers & Acquisitions director Ross Goldstein, who advises many private companies, said he was constantly dealing with private equity firms and found their acquisition criteria, which usually fell into one of two categories, very restricted.
First is investment in a stand-alone business, where they aim to achieve organic growth by partnering with the existing owners and providing extra capital and expertise.
Second is an add-on investment, where the new business is merged with existing portfolio businesses to assist in fast tracking growth.
Mr Goldstein said that, on top of normal due diligence, the four most notable questions private equity firms asked were: how do we exit this investment in three to five years; are the existing shareholders and senior management on board; can we grow this business; and is the business commercially priced?
KPMG partner Adrian Arundell believes current economic conditions favour private equity over other capital solutions.
In particular, he said there were many private businesses that had lifted their financial performance but not reached their full potential, and many business owners wanting to ‘de risk’ their personal finances yet not wanting to sell out entirely.
In these circumstances, “a staged transaction through a private equity structure can be very appealing”.
“In addition, there are a number of private companies seeking expansionary capital that can no longer be sources from the traditional debt markets. PE funding fills this gap,” Mr Arundell said.
“The PE solution is also becoming increasingly flexible, able to look at everything from minority positions through to complete buy-outs.”
Dorado Capital’s Tim Moore believes the three most important ingredients in a vibrant market for private equity transactions are: founders with no clear exit from their business; confidence in future business conditions; and access to bank debt.
Opportunistic deals
Private equity investors can also be opportunistic, sometimes buying distressed assets.
RCF, for instance, bought Sons of Gwalia’s advanced minerals business out of administration.
Another example was Harmony Capital buying Harvey Beef out of administration.
A third, more recent example was the $47 million MBO of TSMarine’s Asia Pacific business, after its parent company in Aberdeen got into financial difficulties.
The local management appointed Azure Capital to help it canvass options, which included an IPO and a trade sale.
It ended up partnering with CHAMP Ventures, which had never previously invested in the oil and gas sector.
One of the state’s largest private equity investments appears to be heading toward the all-important exit stage.
In 2007, Gresham Private Equity acquired a 70 per cent shareholding in mining contractor Barminco for a rumoured $300 million.
Barminco announced last week that Goldman Sachs would provide $50 million in new capital, in the form of a ‘mezzanine’ facility, to support its growth, and had commenced a strategic review of its capital and ownership structure.