A key highlight was the healthcare sector, which was a major contributor to the results, and PE activity was on an upward curve for much of FY2016, as had been predicted in MinterEllison's 2015 Directions in Private Equity Report.
"PE activity in the healthcare sector increased substantially in the past financial year," said Ricky Casali, MinterEllison Private Equity partner. "PE was also very active on exits in this sector, particularly to Chinese buyers."
He highlighted the exit by KKR from GenesisCare (Australia's largest provider of radiation oncology and cardiology treatments) by way of a trade sale to Macquarie/China Resources for A$1.7billion and the exit by Archer Capital from Healthe Care (Australia's third largest private hospital operator) by way of a trade sale to the China-based Luye Medical Group for A$938million.
Last year's MinterEllison Report had flagged technology as a likely area for increased PE interest. Private Equity partner Glen Sauer said this prediction held true in FY2016, and pointed to the examples of Affinity Equity Partners' purchase of the MedicalDirector software business from Primary Health Care for A$155million (MinterEllison advised Affinity Equity Partners) and CHAMP Equity's investment in Containerchain.
This year's MinterEllison Report also highlights the likely strength of PE in FY2017, in spite of Australian PE deal activity decreasing in the last quarter of FY2016 against the background of increased macroeconomic instability and political uncertainty leading up to the federal election.
Hot sectors FY2017
MinterEllison confirmed the hot sectors for FY2016 had been health & allied services. "Home care is the hot trend, with Government policy favouring consumer directed care. This has led to increased interest by PE in allied health services in both the aged care and disability sectors, with the National Disability Insurance Scheme also creating opportunities for PE," said Mr Casali.
For FY2017, child care will continue to be a hot sector. "Favourable Government policy with non-means tested child care rebates and benefits and a fragmented industry will continue to drive consolidation," Mr Casali said.
MinterEllison also expects turnaround and transformational capital funds to be particularly active across a wide range of industries, while growth funds are likely to make more investments in 'experiential' businesses (eg, tourism, hospitality, fitness and wellness).
Mr Sauer noted that PE funds are being increasingly creative to generate value. "One trend we’re seeing is the 'buy-and-build' strategy of rolling-up related businesses in fragmented markets to create businesses of sufficient scale that are more likely to be exited via an IPO or trade sale."
He pointed to Quadrant Private Equity's recent acquisition of Great Southern Rail from transformation capital specialists Allegro Funds (advised by MinterEllison) as the cornerstone of an 'experiential tourism' play, and Quadrant Private Equity's roll-up of Fitness First, Goodlife and Jetts to create Australia's largest gym/fitness group as examples of this trend.
MinterEllison expects PE funds to benefit from larger companies continuing to rationalise by divesting ancillary non-core operations to focus on core assets. "These 'unloved business orphans' are attractive to PE funds who can provide the necessary resources and capital investment required for them to flourish," said Mr Sauer.
He also expected increased PE investment in technology companies. "US PE funds have ramped up their investments in technology companies in recent years and Australian funds are getting more comfortable in investing in this sector as the growth opportunities are hard to ignore," Mr Sauer said.
Trends and Drivers
The MinterEllison Directions in Private Equity Report 2016 also identified the trend to investment partnership models with co-investment deals gaining momentum in the market. Increasing fee pressure is causing superannuation funds to actively seek direct access to privately owned businesses with growth potential.
At the same time, a lower A$ and a low interest rate environment is fostering strong competition for assets.
“The A$ dollar remains lower relative to many other major currencies, making Australian assets attractive to foreign acquirers. Together with this, an influx in foreign buyers (particularly from China) is resulting in increased competition in particular sectors and asset types (in particular health), and this in turn is bidding up asset prices for domestic purchasers,” said Mr Casali.
"We expect that this increased competition will force the typically sector-agnostic private equity investor to either pay higher multiples in hot sectors or strategically consider more creative opportunities in alternative sectors."
Looking ahead, MinterEllison sees a strong pipeline of potential PE investments as a result of higher levels of VC investment and foreign interest in the Australian market.
"We are in a period of positive increased activity in the venture capital industry and, as a result, we expect that the Australian private equity industry is likely to benefit in the long-term," said Mr Sauer.
"Sectors traditionally attractive to venture capital, such as life sciences and information and communication technology, will continue to grow due to increased capital availability and support courtesy of the Australian Government's innovation agenda, offering PE funds a strong pipeline of potential investments."
MinterEllison's Directions in Private Equity Report 2016 also confirmed that PE is keeping skin in the IPO game, with institutional and retail investors increasingly expecting PE funds to demonstrate their confidence in the upside potential of an investment post-IPO by retaining stakes in the range of 20% to 40%.
"We expect that this trend will continue," Mr Casali said.