Private equity’s key investment role

Private equity investors participated in some of the largest and most notable transactions in Western Australia in 2005, including the rescue of biotech company Chemeq and the acquisition of EG Green Group.

Last year’s transactions also highlighted the blurring of the line between private and public equity.

A classic private equity transaction was that made by AMP Capital Investors, which invested extra money in Kewdale-based transport company Mitchell Corp Australia.

AMP has invested $16 million in Mitchell in the past 18 months, lifting its stake to 32 per cent.

Its investments have allowed Mitchell to remain privately owned, while giving it the capacity to pursue a strategy of rapid growth.

The Mitchell transaction was one of four substantial investments AMP Capital Investors made in WA during 2005.

It invested $11 million in industrial products distributor Heatley Sales and acquired majority shareholdings in Total Eden Watering Systems and WA Forktrucks, which is planning to fold together several subsidiaries in WA and interstate under the brand United Equipment.

Heatley chairman Geoff Heatley said the original shareholders in his company personally lacked the capital to support its planned national expansion but AMP’s backing would give it extra scope for growth.

“Our new partner, AMP Capital, supports the business strategy and will assist us in developing a truly national corporation with a family based culture,” Mr Heatley said.

Speaking at the time of the investment, AMP Capital Investors operations director Bill Cook said a notable feature of the Heatley transaction was the rapid turnaround.

It took just six weeks from the first meeting until financial close, including financial and technical due diligence.

Private equity deals can also be used to support ownership and management succession.

Typically the vendor will remain in the business for two to three years as a minority shareholder, while management will acquire a small shareholding.

AMP’s growing presence in the WA market is helping to fill the gap left by Foundation Capital, which has withdrawn from the private equity sector to concentrate on early-stage venture capital funding.

Over the past decade Foundation invested in some of WA’s best known companies, including boatbuilder Austal (prior to its float on the ASX), sandalwood products maker Mt Romance and food manufacturer Kailis & France Foods.

One of the biggest deals last year was Archer Capital and Pacific Equity Partners’ investment of $50 million in Redcliffe-based Emeco International, Australia’s largest provider of earthmoving equipment.

This followed their acquisition of Emeco from a private US company for $499 million in December 2004.

Emeco managing director Laurie Freedman said the latest equity investment, and an increase in banking facilities, was driven by strong demand for its services and its ongoing search for acquisition opportunities.

 “The additional $225 million of capital provided by our shareholders and banking syndicate will enable the Emeco Group to exploit a range of attractive growth opportunities in Australia and internationally,” Mr Freedman said.

One of the traditional advantages of private equity is that the investors can take a longer-term view, and not be overly focused on short-term profits.

This is highly relevant for companies such as Mitchell and Emeco, which are achieving rapid growth in sales but have not yet reported higher net profits.

US fund manager Stark Investments has been involved in three transactions in WA in the past year.

The most recent was its successful $27 million bid, in tandem with Singapore fund manager Harmony Capital Partners, for EG Green Group’s core assets, including its Harvey abattoir.

Like all private equity investors, Stark and Harmony will already have a view toward their likely exit strategy.

They have mentioned a possible float of EG Green on the stock market but another option would be a trade sale of the business.

Stark teamed up with another big international fund manager, London-based Mizuho International, to rescue embattled biotech company Chemeq early this year.

Stark has since bought out Mizuho, making it the owner of $60 million of Chemeq convertible bonds.

Its third transaction – more akin to a public investment – was the acquisition of a 19.9 per cent shareholding in Brandrill.

Once again, Stark bought the Brandrill shares from Mizuho, which rescued Brandrill from administration in late 2004.

Another institution that made inroads into WA last year was Perpetual Investment Management, which signed deals with listed company ORT and with private company Perth BioEnergy Holdings Pty Ltd.

In both cases, Perpetual – through its Diversified Infrastructure Fund – will become the major equity investor in projects the companies were unable to fund on their own.

Perth BioEnergy Holdings, whose major shareholders include Beacon Consulting’s Cliff Jones and Gavan Troy, is planning to develop a $100 million, 45-megawatt eco-friendly power station at Neerabup, just north of Perth.

ORT subsidiary Organic Resource Technologies is building a $20 million municipal waste processing facility at Shenton Park using its innovative DICOM system.

Perpetual has agreed to invest up to $12 million in the plant.

ORT provides an interesting case study in the funding options available to emerging companies seeking to commercialise a new product or technology.

Individual investors funded the original development of its technology in Perth. When they exhausted their financial resources, however, the company listed on the ASX.

That provided a short-lived benefit, since the company exhausted its cash reserves and was unable to raise any extra funding through the stock market.

Perpetual’s head of infrastructure, Brett Lazarides, said the diversified infrastructure fund took a long-term view.

“We invest on behalf of superannuation funds and they have a 30-year investment horizon for the asset class, as we do,” he said. “We invest over the full life of the project.”

The blurred line between public and private equity was illustrated by the activities of listed investment company Souls Private Equity.

Despite its name, Souls invested in two publicly listed WA companies last year.

It pumped $3.8 million into West Perth-based drilling products supplier Imdex and $2.1 million into aqua-culture producer Marine Produce Australia.

Souls Private Equity, which listed on the ASX in December 2004 after raising $135 million, is the private equity investment arm of listed investment company Washington H Soul Pattinson and Co.

Souls chairman Robert Millner gave some insight into the rigorous evaluation process of private equity investors.

In a presentation to its annual meeting, he said the company had evaluated 223 potential investments since listing, and had invested in just over a dozen of these.

Its investments are split between listed companies and small to medium sized enterprises, though nearly half its assets are held in cash.

One of its newest investments will ultimately result in Perth-born business Jesters Pies relisting on the ASX.

Souls has teamed up with Hunter Bay Partners, which currently owns Jesters and doughnut franchise Krispy Kreme Australia, to establish a new company called Food and Beverage Company.

FBC’s strategy is to build a portfolio of quality consumer brands in the food and beverage sector.

Mr Millner said Souls and Hunter Bay would endeavour to list FBC on the ASX as soon as practicable.

To support its development, Souls has agreed to provide up to $25 million in pre-IPO funding to FBC in the form of convertible notes.