Private equity on the march in WA but deals scarce

Private equity funds are scouring Western Australia, looking to invest in local businesses but only a handful of deals have been completed.

The stockmarket is weak and bank loans can be hard to come by but private equity funds are stocked up with money and looking to invest.

That is the message from investment bankers, and private equity funds themselves, which have been lured to Western Australia by the state’s strong growth outlook, particularly in the surging oil and gas sector.

While many people equate private equity with buying distressed assets and implementing brutal restructuring measures, most PE funds are actually chasing growth stories.

And there are few places around the world that offer more opportunities than WA. 

But despite the heightened interest, the deal flow has been modest.

There have been only a handful of genuinely new private equity investments in WA-based businesses in the past year, according to research by WA Business News.

These include Catalyst Investment Managers’ recent investment in rapidly expanding Bhagwan Marine, and Banksia Capital’s investment in Skill Hire (see more below).

Other deals completed during the past year have included Lazard Australia acquiring a shareholding in oil and gas consultancy RISC and Archer Capital funding a secondary buyout of Quick Service Restaurant Holdings – the owner of the Chicken Treat and Red Rooster fast-food chains.

Over the same period there have been several exits, with private equity funds selling their interest in WA companies like trucking operator Mitchell Corporation, TSMarine Asia Pacific and Seven Media Group.

Notably, there have also been instances where private equity funds have been unable to exit their investments as planned. 

The prime example was Gresham Private Equity, which had pursued a stockmarket float for its majority-owned mining contractor Barminco but pulled the deal when it was unable to achieve its preferred price.

This illustrates the fact that a weak stockmarket is both a blessing and a curse for private equity. It creates opportunities for new investments, but also crimps the private equity business model because it takes away one of the exit options – especially when companies like Myer and Collins Foods tank after their private equity owners listed them on the stockmarket.  

Looking at new investments, and exits, tells only part of the private equity story.

Perhaps even more interesting are the businesses that have been able to pursue their growth strategy after gaining backing from private equity funds.

Companies like engineering firm Calibre Global, equipment supplier Onsite Rental Group, accommodation village operator NLV Group and caravan park owner Discovery Parks are all on a growth path, helped by the deep pockets and guidance of their major shareholders (see page 14).

And then there are the long-term turnaround stories – companies like Alinta Energy, dairy operator Brownes and beef processor Harvey Beef that were either underperforming or unwanted by their previous owners.

They are now owned by private equity funds, which are aiming to succeed where others failed.

Who’s investing?

More than 20 private equity groups have acquired, or invested in, WA businesses over the past decade, and that number is set to grow.

“We’re seeing a lot more private equity firms looking for opportunities in this market and getting exposure to what is happening in WA,” Ernst & Young’s regional leader transaction advisory services, Michael Anghie, said.

He said there were not many formal sales processes under way; instead the private equity funds were undertaking proprietary work in pursuit of new opportunities.

Their primary focus is the resources sector, in particular oil and gas, which offers high growth potential.

KPMG corporate advisory partner Greg Evans has also observed more interest from private equity funds.

He said the ideal scenario for private equity investors was a business in a high-growth industry with an entrepreneurial founder.

“They are looking for upside and often the entrepreneurial founder is the best person to deliver that,” Mr Evans said.

Groups to have invested in WA in recent years include established national players like Quadrant Private Equity, CHAMP Ventures, Ironbridge Capital and Gresham Private Equity, which is part-owned by Wesfarmers.

International groups, such as mining specialist First Reserve Corporation, Malaysia-based Navis, Harmony Capital and private equity giant TPG Capital, have also invested in WA businesses.

In broad terms, the modus operandi of all these groups is simple – they attract money from superannuation funds and insurance companies on the promise that their ‘alternative’ investments will spread risk and deliver superior returns.

Several national players are believed to have recently closed new funds – Archer Capital, CHAMP, Quadrant and RMB Capital. They are among the many private equity funds visiting Perth regularly looking for new opportunities.

Depending on their size and investment focus, they face competition from the handful of Perth-based private equity players – mining industry specialist Resource Capital Funds, the Wyllie family backed Viburnum Funds, Banksia Capital and, on a smaller scale, Akamai Management Group.

They will also come up against Catalyst Investment Managers, which last year opened a Perth office, signalling its strong interest in WA opportunities.

Despite the large number of funds looking to invest, advisers say that pricing multiples have not changed. 

For instance, Archer Capital is believed to have paid the same earnings multiple for Quick Service Restaurant Holdings in 2011 as Quadrant Private Equity paid for the business in 2007.

The quantum increased substantially – the 2011 purchase was based on an enterprise value of $450 million – but that was because earnings had also grown.

This year’s deals

The opening of Catalyst’s Perth office was followed early this year by its investment in Geraldton-based Bhagwan Marine – a deal that typified what many private equity funds are aiming to achieve.

Bhagwan is a privately owned business that started life in crayfishing but over the past decade has acquired a fleet of specialist vessels to service the oil and gas sector and inshore construction projects, like wharves.

It has 50 vessels, mostly operating from Dampier, generates annual turnover of $120 million and plans to acquire more vessels to support planned growth around the country.

Discussing the Catalyst deal with WA Business News, Bhagwan director Loui Kannikoski said he realised more than a year ago that he needed more capital and, from that point, started a careful evaluation of his options.

He knew that Bhagwan was not ready for a stockmarket float, having seen many “horror stories” from other companies going too early to an IPO.

The result was a deal with Catalyst but only after about 10 months of getting to know each other and feeling comfortable with the partnership.

Catalyst has taken a “significant minority” shareholding in Bhagwan, for an undisclosed sum.

While the Kannikoski family has retained a majority shareholding, it has agreed to give up majority control of the board.

Catalyst will have three representatives on the five-person board, including chairman Anthony Wooles, who will be a co-investor in the company.

In addition, Bhagwan has agreed to appoint a finance director.

Another Catalyst deal this year was an investment in Brisbane-based Morris Corporation, which has grown to become one of the major operators of mine-site accommodation in WA and Queensland.

It operates about 20 mine-site camps across WA, notably at Fortescue Metals Group’s iron ore projects.

Like some other players in the sector, it is also moving into a ‘build, own, operate’ business model, which is more capital intensive.

Illustrating the diverse investments often made by private equity managers, Catalyst’s other WA interests include candle and fragrance retailer Dusk.

Perth-based Banksia Capital also has a diverse portfolio, ranging from retail franchise Croissant Express to Pioneer Credit and Cool Clear Water.

It added to its portfolio in January by investing in employment and training company Skill Hire, which is looking to step up its growth, including through acquisitions.

Banksia is believed to have invested between $10 million and $15 million, giving it a substantial minority stake.

The existing shareholders, Tony Fitzpatrick, Greg Stocks and Robert Stockdale, have retained a majority stake in the business, which historically has serviced the building and construction industry.

Chief executive Steve Edgar said the business was looking to expand nationally and also intended to diversify into the resources sector, to add to its $50 million annual turnover.

Mr Edgar said Skill Hire had evaluated lots of acquisition opportunities and, therefore, had a good knowledge of industry valuations, which helped the negotiation process.

It was also helped by having Steve Birkbeck and Ian Murchison on its board; both men brought experience in venture capital to the role, via their involvement with Foundation Capital.

Conversely, Banksia’s Mark Dutton is looking forward to sharing his commercial acumen with Skill Hire, to help the business achieve its goals.

“This is a classic Banksia investment to provide not just growth funds to a local private company but also offer experience in building local and national market leadership positions,” Mr Dutton said.

How to get ready

For businesses thinking about partnering with a private equity investor, Ernst & Young partner Peter Magill has a few tips.

He said timing could be critical; in particular, private equity funds are keen to buy into a business when there is still good upside potential.

“Vendors need to commence a sales process when there is good visibility on future earnings,” he said.

This usually involves the owner staying in the business.

“As an owner, you need to be committed to driving the business to the next level,” he said.

Mr Magill said that was a positive for most entrepreneurial business owners, who could get a new lease of life from the financial and managerial support offered by a private equity investor.

He said business owners that were absorbed in the day-to-day running of their business would be limited.

“You need to have spent some time getting a clear idea of where your growth is going to come from,” he said.

Business owners who have often enjoyed being their own boss also need to understand they will have a partner in their business and need to be able to work with them.

They also need to understand that the private equity investor will be looking to exit in typically two to four years.