Private Equity Returns to Australia -- Update

By Dow Jones Business News, 

By Ross Kelly and Cynthia Koons

When it comes to investing in Australia, private-equity firms are back.

After a lull in activity Down Under in the wake of the 2008 financial crisis, global firms such as KKR & Co. and TPG Capital are on the hunt again, having recently raised large amounts of capital to deploy in the Asia-Pacific region. That has inspired a renaissance of buyout activity in Australia, one of the few markets in the region where private- equity firms can do full takeovers.

In the first five months of the year, announced private-equity takeover deals in the country hit US$5.5 billion, according to Dealogic, higher than the amount for any full year since 2006.

"Many of the large local and global private-equity firms have recently raised new funds, so they have significant war chests," said John Knox, Credit Suisse's co-head of investment banking in Australia.

He added that "debt markets are very strong, probably the strongest they have been since 2007," allowing private- equity firms to take on more leverage at a lower cost.

Asian and Australian banks have been eager to lend to deals in recent months, while the U.S. debt markets have become a source of funding for Australian deals, giving firms a number of options when it comes to securing debt.

Meanwhile, fundraising in Asia has picked up steam in recent months, with KKR last year raising a US$6 billionAsia fund, the biggest ever for the region, and TPG closing a US$3.3 billion fund last week. Australian private-equity firm Pacific Equity Partners, or PEP, meanwhile, is currently raising capital for its fifth fund, potentially targeting around three billion Australian dollars (US$2.8 billion), a person familiar with the raising said. It will be competing for capital with Carlyle Group, which is also looking to raise a US$3.5 billion fund for Asia.

That has led to a spurt of jumbo deals in Australia. Compliance services provider SAI Global Ltd. said Monday that PEP bid A$1.1 billion (US$1 billion) for it. Last week, KKR bid A$3.05 billion for Treasury Wine Estates Ltd., the world's second-biggest listed vintner. Also, TPG bid for the DTZ property services unit of Australian engineering company UGL Ltd., a person familiar with the matter said earlier this month, in a deal that could be valued at more than A$1 billion. Treasury Wine rejected KKR's offer but said it is open to others, while UGL said it is still assessing the merits of any offers for DTZ.

"Many companies have been waiting for an opportunity to restructure their operations by unloading units that are deemed to be noncore to some of their strategic objectives, and private-equity funds tend to pick up those types of businesses," said Yasser El-Ansary, chief executive of the Australian Private Equity & Venture Capital Association.

UGL considers DTZ to be a noncore asset, while other companies across myriad sectors have indicated, too, that they could part with business units to help bolster their balance sheets.

National airline Qantas Airways Ltd., for example, is considering a sale of its frequent-flier business, while mining company BHP Billiton Ltd. is shopping assets considered marginal to its operations. Australia's slowing mining boom has also thrown up potential companies private-equity firms can set their sights on.

"The economic environment in Australia has been relatively tough, and many believe the outlook is better," Mr. Knox said. "Some companies haven't been able to grow so they are natural targets."

Meanwhile, Australia's stock market is up 11% in the past 12 months, after the central bank relaxed interest rates to help spur growth. The Reserve Bank of Australia has cut interest rates eight times over the past two years to a record-low 2.5%, helping to drive activity in the country's housing market and potentially reigniting the retail sector.

With the stock market hovering near six-year highs, private-equity firms can now exit from investments through initial public offerings. That option hasn't been readily available over the past few years. TPG's disappointing float of department store Myer in late 2009 left investors wary of new offerings.

The IPO market, however, is starting to show signs of life again. PEP partially exited from cleaning-and-catering company Spotless Group Ltd. through an IPO last week and TPG and Carlyle are considering a float of hospital operator Healthscope in a deal that could raise around A$5 billion for its private-equity owners.

New floats help free up capital for private-equity firms to invest. Moelis & Co. analyst Adam Michell said SAI Global, for example, might receive rival offers from other private-equity firms in need of investment opportunities after recent IPOs.

These dynamics should keep private-equity buyouts of Australian companies robust in the next year.

"It's very likely that in the coming 12 months or so we'll continue to see a heightened level of deal activity," Mr. El-Ansary said. "There are a range of industry sectors that have a strong outlook over the coming years--look, for example, at the level of deal activity in the health-care and aged-care space."

Write to Ross Kelly at and Cynthia Koons at

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