November Deal Metrics Survey A survey of Australian VC and PE deal activity in FY In association with
AVCAL Deal Metrics Report Message from the Chief Executive Welcome to the AVCAL and Pacific Strategy Partners Deal Metrics Survey: the fourth annual report of private equity (PE) and venture capital (VC) deal activity, covering deals executed up to the end of June. These deal metrics are important for the effective tracking of how PE and VC deals and valuations are trending over the short, medium and long term. Since the last report, PE transaction values among local PE managers have remained steady, amid an uncertain and volatile global market. The cautious environment nevertheless resulted in the lowest average entry and debt multiples seen in the last six years. VC transaction values were up slightly, but fund managers continue to face major hurdles raising new capital from local institutions. We would like to thank Pacific Strategy Partners for their valuable input into the production of this report. Katherine Woodthorpe Chief Executive, AVCAL November
AVCAL Deal Metrics Report Executive Summary The fourth annual AVCAL/Pacific Strategy Partners Deal Metrics Survey of private equity (PE) and venture capital (VC) activity covers $77.7b worth of transactions conducted by 7 funds between -FY. The database now represents total PE deal value of $76.7b across 77 transactions and total VC equity investment of $6m across 8 transactions. Many transactions from -FY) have also been updated and refined with new data provided by PE and VC funds. We also conducted interviews with PE and VC funds, industry advisors, and equity and debt providers to gauge the industry s recent performance and future outlook. In spite of the difficult macroeconomic climate hampered by the European and American debt crises PE transaction value and volume remained consistent (with the exclusion of two outlier deals conducted in FY). Survey respondents were confident that the deal pipeline in FY had improved on FY, driven by increased succession pressures and converging price expectations. Market caution saw assets exchange for slightly lower multiples in FY. However, a common theme emerging from the surveys was that strong prices were still available for quality assets. Debt availability and fundraising remained tight in FY, as debt and equity providers became increasingly selective about the PE funds and sectors they were willing to support. Exit conditions also remained difficult and, with IPO markets remaining virtually closed, secondary deals (sponsor-to-sponsor) and trade sales became increasingly popular exit routes. In terms of the VC industry, the value and number of investments in FY increased slightly from the previous year, with the aid of the growing domestic start-up scene. In addition to this, Government support in the form of the Innovation Investment Fund (IIF) programme has delivered growth in fundraising. However, as the IIF programme draws to a close and the difficulties VC funds have had securing money from the private sector become apparent, VC funds are increasingly looking beyond their traditional investor base for funds targeting self-managed super funds, high net worth individuals and overseas LP markets (e.g. sovereign wealth funds). In summary, continuing uncertainty in global financial markets caused investors to remain cautious in FY. However there were still good deals to be done in this climate given lower pricing multiples and improved opportunities in the deal pipeline. For further information, please contact: Pacific Strategy Partners Chris Paxton Director Tel: +6 Email: chris.paxton@pacificstrategy.com.au AVCAL Kar Mei Tang Head of Research Tel: +6 8 7 Email: karmei.tang@avcal.com.au Note: Database does not include refinancing transactions or cash injections and treats co-investments as a single transaction.
Private Equity A focus on defensive deals in a challenging environment FY was a challenging year for the Australian PE market following the impact of the Eurozone crisis and the continued uncertainty surrounding the recovery of the US economy. The total enterprise value (EV) of all PE deals in FY was $.b, similar to FY levels. In terms of transaction volume, there were fewer new deals completed in FY than in previous years. However, new deals accounted for a slightly larger proportion of transactions done over the financial year (% in FY, compared to % in FY). Figure : Enterprise value of PE transactions, - FY (A$b) Figure : Number of PE transactions, - FY 6 Bolt-ons New transactions Bolt-ons New transactions Adjusting for two mega-transactions with a combined EV of $.8b, FY EV is $6.b 7 8 68 8 6 7 6 6 8 77 8 FY7 FY8 FY FY FY FY FY7 FY8 FY FY FY FY Lower levels of transaction volume and value in FY could be attributed to the heightened caution of buyers and sellers in this difficult economic climate. Many PE funds surveyed noted the high prevalence of broken processes, which was partially driven by greater levels of discipline among PE firms, many of whom were only willing to invest for the right deal given the challenging fundraising environment. Consequently, the transactions that were completed in FY were largely defensive deals assets with strong performance track records and solid growth prospects. Transactions in this climate were generally also more complex and took longer for PE funds to execute, reflected by the lower volume of transactions completed in FY. On a more positive note, 7% of surveyed PE funds believed that the deal pipeline had improved in volume and quality of opportunities over the last year, particularly in the low to mid-market space. Increased succession pressures and converging price expectations between buyers and sellers were the main factors behind this uptick. Figure : Views on changes in PE deal pipeline, FY - FY (% of interviewed respondents) 7% AVCAL Deal Metrics Report Improved % Similar % Deteriorated
Adjusting for the two mega-deals which occurred in FY, the first half of FY saw an improvement on the prior year in terms of deal value. Nonetheless, the quarterly moving annual total (MAT) shows that despite a relatively solid first half of FY, total deal value declined in the later stages of FY as the Eurozone debt crisis unfolded. Figure : Moving annual total (MAT) of EV of PE transactions, - FY (A$b) 6.8. 6..8.. 6....6...... Ave:.6....8 7. 7.6.8. 8. 8... Q Q Q Q Q Q Q FY7 FY8 FY FY FY FY Similarly, the apparent decline in the average value of new deals between FY-FY can be accounted for by FY outliers which, if removed, show that average new deal value actually increased by % over that period from $m to $m. Conversely, the average value of boltons decreased from $m in FY to just $7m in FY. Figure : Average EV of new PE transactions, - FY (A$m) Figure 6: Average EV of bolt-on PE transactions, - FY (A$m) A$m Adjusting for two multi-billion dollar new deals, average EV in FY was $m A$m 7 68 6 6 7 7 FY7 FY8 FY FY FY FY The number of transactions in each EV band remained relatively similar to the prior year. Figure 7: Number of new PE transactions by EV band, - FY 66 7 6 7 6 EV < $m EV $ - $m EV > $m AVCAL Deal Metrics Report % Total deals % % 8 % 8 Two multi-billion dollar transactions in the healthcare and energy sectors bolstered FY figures
Attractive prices and debt availability for quality assets Weighted average pricing multiples (EV/EBITDA) declined from 8.x in FY to 6.8x in FY. This change was driven by continued economic uncertainty, which reduced bidding competition and exerted downward pressure on prices. Nonetheless, many funds surveyed noted that good multiples were still available for strong assets with promising growth trajectories. Figure 8: Average EV/EBITDA & debt/ebitda multiples - New deals, - FY. 8 7. 8. 7.6 7. 8. EV/EBITDA 6.8 6.7 6..... Debt/EBITDA.8 FY7 FY8 FY FY FY FY Note: Weighted by transaction enterprise value Debt funding remained tight in FY, as weighted average debt multiples (debt/ebitda) decreased slightly from nearly x in FY to -x in FY. This shift in the debt multiple is representative of the fact that lenders are more willing to allow funds to be borrowed against a stronger cash fl ow. However, equity contributions reported also declined (% in FY, as compared to 6% in FY), because deals at the top end of the market ($m in EV and above) were more highly leveraged than in previous years. Survey participants noted that while banks were increasingly selective in the PE funds and assets they backed, most were showing an increasing appetite and fl exibility for good assets in growth industries. Senior debt was again the primary source of funding in FY. However, surveyed funds commented on the gradual re-emergence of subordinated debt throughout the year. Figure : Average equity contribution (% of total EV) - New deals, - FY 6% % % % % % 7% AVCAL Deal Metrics Report FY7 FY8 FY FY FY FY Note: Weighted by transaction enterprise value AVCAL Deal Metrics Survey captures only those deals that are reported by contributing members. The equity percentage in fi gure represents the equity contributions of the private equity manager only and not those of the management or co-investors.
AVCAL Deal Metrics Report Fundraising: A preference for quality The majority of respondents interviewed (8%) believed that the fundraising environment was more challenging in FY. Limited partners (LPs) continued to be constrained by the decline in value of listed assets making portfolios overweight in PE as well as by tough exit conditions, which slowed the pace of distributions returned to LPs from earlier vintages. Figure : Views on fundraising conditions in FY (% of interviewed surveyed respondents) 8% 8% % Improved Similar Deteriorated On a more positive note, the LPs interviewed were optimistic about this current vintage of PE funds, citing good experiences with the asset class in the past and their belief that the industry was turning a corner. Nevertheless, LPs have become increasingly selective in who they fund, favouring a handful of general partners (GPs) with strong track records and promising projections. In terms of funding sources, an increasing proportion of fundraising in FY came from international investors who channelled funds into the Asia-Pacific region as an alternative to exposure to European markets. Conversely, domestic interest in PE remained cool because of recent changes to the MySuper legislation, which will make it more difficult for superannuation funds to be invested in PE from FY onwards because of the industry s relatively high fee structure. Challenging exit environment FY was a challenging time for funds seeking to realise exits for portfolio companies. Many funds commented on the large amounts of time and effort required to secure a buyer in this climate. Secondary transactions and trade sales continued to be popular means of exit in FY, as IPO markets remained flat as a result of continued economic uncertainty. Figure : Views on exit conditions in FY (% of interviewed respondents) % 6% % Improved Similar Deteriorated 6
Mixed performance across sectors Consumer goods saw an increase in investment in FY relative to prior years, as did healthcare & life sciences and energy & environment when two outlier deals from FY were excluded (Healthscope and Alinta Energy respectively). Figure : Transaction EV by industry sector, - FY (A$b) Business & industrial products & services Consumer goods.6..7..6..6....... Energy & environment Healthcare & life sciences..........6.7... Technology & communications.6 Other.....6.....6..8. Note: Sectors with fewer than three companies receiving investments have been aggregated into Other. EV/EBITDA multiples and to a greater extent, debt/ebitda multiples, have declined across all sectors relative to previous years. Figure : Average EV/EBITDA by industry New deals FY Average FY multiple Average - FY multiple Figure : Average debt/ebitda by industry New deals FY Average FY multiple Average - FY multiple 8 6 7. 8. 7...7 6. 7 6..7.. 6.. AVCAL Deal Metrics Report 7 Business & industrial products & services Consumer goods Energy & environment Healthcare & life sciences Technology & communications Other Business & industrial products & services Consumer goods Energy & environment Healthcare & life sciences Technology & communications Note: Sectors with fewer than three companies receiving investments have been aggregated into Other. Other
Venture Capital Increase in VC investment The VC industry experienced an increase in both investment value and volume in FY as a result of the growing domestic start-up scene. Fundraising grew due to the ongoing support from the Government s IIF programme to assist VC funds looking to commercialise Australian research and development. On balance, the IIF has been a successful programme and there continues to be strong demand from the early stage business community for the Government to extend the programme or to implement similar schemes to support Australia s strong research capabilities. Figure : Value of VC investments, - FY (A$m) Figure 6: Number of VC investments, - FY 7 Subsequent rounds New investments Subsequent rounds New investments 8 6 68 8 6 7 8 8 7 6 76 6 7 6 76 8 68 6 8 7 7 8 FY7 FY8 FY FY FY FY FY7 FY8 FY FY FY FY Number of companies invested in 7 7 7 8 7 8 Looking at VC investments on a quarterly MAT basis, a notable uptick in investments over the last two quarters can be observed, following a trend of declining investments over the past three years. One of the drivers behind higher levels of new activity in FY has been the resurgent domestic start-up scene which has helped drive investments in the technology sector. The issuance of IIF licences to new fund managers has driven capital raising and is expected to reinforce the recent growth in the local start-up scene. Figure 7: Moving annual total (MAT) of VC investments, - FY (A$m) 7 8 7 76 76 6 7 8 68 7 7 7 78 8 7 76 7 88 8 8 8 6 7 7 6 8 6 7 6 68 68 66 67 8 8 6 6 8 Subsequent rounds New investments 8 8 8 8 8 7 AVCAL Deal Metrics Report Q Q FY7 Q FY8 Q FY Q FY Q FY Q FY 8
AVCAL Deal Metrics Report The average size of new investments in FY increased slightly on the previous year to $.m, while the average size of subsequent investments declined to $.8m. Figure 8: Average VC new investment size, - FY (A$m)..8.8. Figure : Average VC subsequent investment size, - FY (A$m)..8.6.6...........8....8.8....8.6.6...... In terms of sector specifi c activity, VC investment in the technology & communications industry increased by % from FY. Higher levels of investment were also recorded by the business & industrial products & services and computer & consumer electronics sectors in FY. Figure : VC investment by industry sector, - FY (A$m) 6 Healthcare & life sciences Technology & communications Business & industrial products services Computer & consumer electronics Energy & environment Other Number of transactions 7 Note: Sectors with fewer than three companies receiving investments have been aggregated into Other.
AVCAL Deal Metrics Report Figure : VC investment by industry sector, - FY (A$m) Business & industrial products & services Computer & consumer electronics 7 6 7 Energy & environment 7 Healthcare & life sciences 8 78 7 8 8 6 Technology & communications Other 78 6 7 7 8 7 Note: Sectors with fewer than three companies receiving investments have been aggregated into Other. New funding sources Surveyed respondents agreed that VC funding has been difficult to obtain in the current challenging economic climate, despite a consolidation of industry players. With no clear extension or successor to the successful IIF programme announced to date, VC funds have been increasingly turning to alternative sources for funding, both in Australia and abroad. The broader pool of VC funds is now targeting self-managed super funds, high net worth individuals and sovereign wealth funds. The financial and management expertise VC provides to research entities is pivotal to the successful transformation of promising research into a commercial reality. Continued Government support of the VC industry is therefore vital for the continued development and commercialisation of Australia s knowledge base.
AVCAL Deal Metrics Report Outlook Excellent opportunities amid macroeconomic uncertainty Regardless of how the global economic recovery progresses, FY is likely to be a good vintage, as the pipeline increasingly offers up attractive investment opportunities at some of the lowest pricing multiples observed in the history of the Deal Metrics Survey. As many survey respondents commented, If you are buying now, you are buying well. Excluding the occurrence of any significant financial shocks, the deal pipeline looks set to improve in FY in terms of the volume and quality of opportunities it presents. Potential publicto-private transactions should remain on the radar, especially for stocks with a small market capitalisation, given the flat performance of the listed equities market. As a result of the relative strength of the Australian economy, we should see continuing interest by international PE funds in Australian assets. In terms of pricing, multiples are likely to remain relatively unchanged in FY. This is likely to be dictated by the continued restraint shown by buyers in the absence of definitive signs of economic recovery and reduced bidding among PE funds as a result of the increased industry consolidation. Ongoing economic uncertainty will continue to make debt and equity providers cautious, although there is likely to be continued interest by international LPs attracted to Australia s strong fundamentals. From a sector perspective, businesses in health and aged care, education, infrastructure and financial services are likely to be strong areas for growth in FY, in line with demographic and government spending trends. Both consumer goods and healthcare & life sciences, which have underperformed in recent years, are expected to see continued growth and are likely to present attractive opportunities in the coming year. In this atmosphere of lingering market caution, most deals done across all sectors will continue to be defensible deals in businesses with strong value propositions and good growth trajectories. In the VC sector, fundraising will remain challenging in the absence of continued Government support through the IIF programme. VC funds will have to continue sharpening their fundraising strategies, searching for new opportunities both here and abroad to guarantee succession. Despite uncertainty surrounding the macroeconomic recovery, FY will present some attractive opportunities to the remaining players in the VC and PE space with investable capital.
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