Exclusive Q&A on Private Equity with Nathan Cahill
Changes introduced to Australia’s $5m Significant Investor Visa (SIV) Program from 1 July 2015 will include a mandated allocation of at least $500,000 per investor into a registered venture capital or growth private equity fund. We are excited about these changes as they create a good opportunity for greater capital to flow into these areas start-ups and medium sized enterprises.
The Government continues to pressure the superannuation industry to reduce fees borne by investors via compulsory greater fee disclosure with standard reporting across all asset sectors. This has the effect of making private equity and other alternative assets look incredibly expensive relative to other asset classes even when they are not expensive. Superannuation funds are also required to disclose their portfolio holdings even at a portfolio company level however general partners are rejecting access to this information. We are hopeful that government will shortly approve exemptions for private equity and hedge funds in this regard.
In May this year the Government introduced legislation to implement the final stage of the investment manager regime (IMR) which are aimed at removing the uncertainties in the application of Australia's tax laws to widely-held foreign funds and foreign investors in particular regarding the tax treatment of capital gains.
What impact has the record low interest rates had on the private equity industry?
The Australian economy has been fuelled to a great extent by a resources boom over the past 15 years. The downturn in resources driven in part by plummeting iron ore and oil prices has left the sector with tapering investment. Ultimately this has meant higher unemployment and the construction sector has been slow to fill the gap left from tapering resource sector investment. The low interest rates and foreign investment has fuelled inflated asset prices in sectors such as real estate, infrastructure and some private equity. Ultimately for private equity, the low interest rates have not made up for the subdued economic activity and instead has in some areas created mismatches on vendor and GP price expectations.
Given the increased competition for deals where do you see PE firms focusing their attention?
Our observation is that GPs are avoiding auction processes more than ever and focussing more on relationship driven deal flow where they can obtain exclusivity. There has been an emergence of private equity deal origination firms which is providing successful deal flow to some GPs. GPs are also focussing on their own research to ordinate deals rather than waiting for deals to find them. There has also been more secondary deals done in recent years where GPs are buying each others assets. This has created deal flow and has also made sense where one GP has a different skill set or focus which might benefit the portfolio company.
What types of deals or transactions are currently proving popular?
We have been involved in a number of transactions where the more adventurous superannuation funds are buying assets from general partner funds. To manage their capital deployment needs they are buying long term assets particularly those that are protected from tech disruption and perform like infrastructure assets. Examples of such assets are pub portfolios, caravan park businesses. We believe that this long term view of private equity will become popular. An interesting issue will be whether some managers start to focus on putting teams together that are geared to long term asset management.
What areas are being targeted geographically?
There is a lot of capital inflow to Australia and parts of Asia. Australia whilst in a subdued growth environment provides investors with a relatively stable political environment and with a big drop in the Australian dollar exchange rate is providing good buying for foreign investors. Asian deals are still providing good growth opportunities albeit potentially with more downward risk from volatile Asian equity markets. Australian investors are increasingly looking offshore for private equity exposure to diversify their portfolios. To this end, many of the large Australian superannuation funds and the Future Fund are investing in US private equity in particular.
What key trends do you expect to see over the coming year, and in an ideal world what would you like to see implemented or changed?
We don't have to reach too far for the crystal ball because the following is already upon us and gathering momentum...
coinvestments – with fee pressure on super funds, coinvestment deals are gathering momentum. We are seeing a number of super funds step back from fund structures and looking to invest under a mandate structure and in some cases moving to non-discretionary mandates. Whilst in Asia it is quite common for fee free coinvestments, the desire for coinvestment flow has meant many coinvestors are more than prepared to pay fees on coinvestment deals.
capacity – investors are looking for long term relationships with general partners and as such general partners need to be able to solve the issue many super funds have which is that their fast growing capital base is creating deployment challenges and distorting returns. To this end, if general partners can talk to filling investor capacity requirements in a cost effective manner – without strategy drift - they will find a willing audience.
fundraising – there are a number of top quality Australian and Asian general partners coming to market for what will be a strong year of fundraising.
cross border activities- we would hope to see further development of the Asia Region Funds Passport which is being driven by the Asia-Pacific Economic Cooperation (APEC) to facilitate the cross border marketing of managed funds across the Asia region.
Nathan Cahill is a leading private equity and hedge fund formation and financial services industry lawyer with wide experience in local and offshore hedge, private equity and other alternative investment funds.
He is lauded and sought after for his commercial acumen, innovation and valuable strategic advice to major financial institutions and Boards on their key business initiatives including the establishment and restructure of their financial services businesses and defending predatory investors.
He advises some of Australia's leading funds managers and financial services providers on product structuring, IPOs, fund raisings, the investment and divestment process, and offshore products. He has also established some of the most innovative Australian IDPS and wrap platforms.