• Private Equity in Review

Private Equity in Review

After weathering an uncertain 2020, Private Equity (PE) is back with vigour and making up for lost time across the PE funding cycle - with historic highs in fundraising and returns.

Deal activity following the COVID-19 pandemic is remarkably reminiscent of the post-Global Financial Crisis period, with the PE sector capitalising on a myriad of opportunities as the economy rebounded strongly. COVID-19 was a catalyst for PE firms and corporates alike to consider their strategic direction, allowing for continued dry powder accumulation.

Deal activity has been driven by COVID-19, enabling PE firms to take advantage of companies that benefited from the acceleration of consumer focussed and e-commerce trends, and those negatively impacted with depressed valuations. Notably in FY21, Australian PE firm, BGH Capital has taken a growth outlook on distressed industries that had their earnings and valuations depressed, such as travel & leisure with the acquisition of theme park operator, Village Roadshow, online travel agent, Tripadeal, as well as the unsuccessful bid for Virgin Australia Airlines (in FY20).

Sebastian Stevens, National Leader, Private Equity<br>Partner, Corporate Finance

Sebastian Stevens
National Leader, Private Equity

Overall, PE performed exceptionally well in FY21 – with PE returns outperforming most asset classes. FY21 saw PE harness the macroeconomic environment supported by record low interest rates, and target sectors such as Technology, Media and Telecommunications (TMT), Business Services and Consumer.

As we look forward to the next year, we can expect PE funds to further deploy their dry powder, with the merger and acquisition activity pipeline heightened and technology-enabled ideas continuing to garner support by investors and governments.

In this report

  1. Dry powder
  2. Top deals
  3. Sector heatmap
  4. Exits
  5. Returns

1. There has been a monumental rebound in Private Equity activity since the outbreak of the COVID-19 pandemic what does Potentia attribute this to?

Our sense is that both vendors and PE buyers were cautious during the depths of the COVID-19 crisis given the uncertainty from a macroeconomic perspective. Now that economies are opening up and the direction of the economic recovery is much clearer, it is only natural to see a significant rebound in deal activity (with many deals having been delayed 12-24 months).

2. TMT deals dominated Australian PE activity in FY21, what does Potentia see as the key themes for the TMT sector for the next 12 months?

The TMT sector will continue to be an active part of the economy for capital providers, trade players and strategic M&A. Technology as a sector has grown much faster than GDP over the last three decades and we expect that to continue as the economy continues to digitise. Further, many organisations are looking to acquire strategic assets to either speed up the digitisation of their organisation, add a digital presence as part of their service offering or gain tech experience or products which can be achieved with significant scale and speed with a transaction.

The private equity industry, with its longer time horizons than public markets and ability to incentivise talent through management equity plans, is a natural home for tech businesses. However, what has become really clear is that – in order to succeed in a specialised sector like technology – sponsors really need deep industry expertise.

3. What does Potentia see as potential challenges for Private Equity deal activity over the next 12 months?

Increased competition from international trade players due to the strength of the US dollar and increasing appetite for North American vendors looking into other markets for growth.

A clear example is Microsoft’s acquisition of Clip champ in Brisbane.

4. Are there any other observations on the general Australian Private Equity market that you are able to share?

There is a significant amount of dry powder that is looking for investments in all parts of the economy. For founders and family owned business PE it is a method to de-risk and work with professional investors to grow the business for a potential exit in 3-5years. We are also seeing a greater focus on specialisation in the Australian market, whether it is turnaround funds like Allegro who are raising a new fund or Potentia in technology.