Report: Private Equity Horizons 2019 market update

In brief

The busy run experienced by private equity managers in Australia in the last couple of years slowed down considerably in 2019. As a result, having raised record sized funds, private equity managers will be under considerable pressure from their institutional investors to start deploying more capital in early 2020.

The private equity team at Allens reports on some key trends and sectors to look out for.

Key takeaways

  • Level of buyside activity to increase
    The underpenetrated levels of capital deployment, combined with record levels of dry powder, means private equity managers will need to become increasingly innovative in their capital deployment strategies in the second half of 2019 and 2020. We expect deal volumes to increase considerably in the next six to 12 months.
  • The PE investment thesis – larger deals means little room for error
    Domestic and global private equity managers have taken advantage of supportive fundraising conditions, resulting in a record $8.3 billion of dry powder across 10 vehicles, thereby forcing managers to look at opportunities at the larger end of the market in order to deploy for more meaningful equity cheques. Based on our discussions with general partners, given the size of some of these assets, dealmakers are being required by their internal committees to demonstrate how the investment thesis can be realised quickly following completion.
  • PE-style clean exit structures now being used by large corporates
    Warranty and indemnity (W&I) insurance has become a common feature of transactions in recent years, and will continue to develop and grow in Australia over the next 12 months, particularly given its use by corporate sellers and founders seeking to make a clean exit. It is becoming an increasingly attractive proposition and competitive premium pricing is contributing to what is a growing trend for corporates and the world of private equity.
  • Institutional debt markets – here to stay
    The upward trend of institutional investors and private debt funds participating in the Australian leveraged finance market can no longer be categorised as an 'evolution'. The deep liquidity and innovative debt products these market participants bring are readily accessible and are now permanent features of the market. Convergence is a common theme globally in debt markets, too, and the Australian leveraged finance market is no different. We anticipate continuance in convergence as the competition for assets and financings in the private equity sector continues.
  • Lead up to the finish line
    We think the significant pressure being exerted on large corporates by both their shareholders and key regulators means we are likely to see more opportunities for private equity bidders. As such, despite the fierce competition and significant challenges for the private equity industry in Australia, we believe there are plenty of opportunities out there which are likely to keep dealmakers busy.