Sourcing capital

The Gold Coast is set to grow up with private equity, reports Jason Oxenbridge

FAT private equity cash cows are grazing on a fertile capital-raising landscape underpinned by strong economic growth.

There's more money in private equity coffers, including cashed-up super funds, than there is being spent on large-scale buy outs or investment opportunities in the robust small to medium-sized enterprise (SME) market. About half of Australia's top 100 listed companies have offers from, or are in discussions with, private equity companies.

The process of cheaply bringing overseas debt capital into Australia has also become easier in the past year. Private equity in Australia has risen from about $5 billion in 2005 to $26 billion. For businesses looking to raise capital via a bullish equity landscape, that spells opportunity.

But what does it mean for Gold Coast companies eager to expand?

"There's a lot of global capital chasing good business in growth markets," says Mark Richardson, managing director of Sydney-based private equity firm Wolseley.

"For us, the Gold Coast is a growth area. There are companies with a succession of growth, where current owners are looking to sell or bring on significant private equity for expansion.

"The Gold Coast is a tremendous environment for business. We focus on the manufacturing, service and distribution industries - and there are some great opportunities," he says.

Wolseley is juggling about $200 million in equity in deals for 11 mid-market companies, including a successful Gold Coast electrical business ready to expand, its sights set on an ASX listing.

"Our job is to get out and about and meet business owners who fit into the market we concentrate on. The industry is not particularly good at that," says Mr Richardson.

"There are two types of meetings that we love. The first is getting out there and just having a chat, meeting the firms and discussing their business plans.

"The second is a discussion about the type of equity they require. You have to choose your hunting grounds. There's always a conversation to be had regarding shareholders - that's where the rubber hits the road. Once you can demonstrate a good commercial solution, it becomes a matter of a willing seller and a willing buyer," he says.

Hynes Lawyers' corporate partner Scott Standen specialises in corporate law and public and private capital raising. He says the Gold Coast private equity market is 'ripe', but hasn't yet been targeted by large equity firms.

"The economy is strong and there are several new sources of capital emerging, like cashed-up super funds looking to the private equity market to diversify their asset portfolio," he says.

"The average value of private equity transactions is increasing more rapidly than the volume of transactions. This reflects the fact big private equity companies are raising more than what is being spent.

"They have certainly moved up the food chain and opened up new opportunities. The dynamic and growing Gold Coast economy, entrepreneurial spirit and the large number of small and medium enterprises on the Gold Coast are likely to provide increasingly fertile ground for private equity.

"Private equity houses have not targeted the Coast to any great degree. There is an increase in companies seeking equity, but we don't have the headline-grabbing deals like Qantas and Coles. High-profile, high-value transactions are attracting attention, but the majority of transactions occur in mid-markets and go largely unnoticed."

Private equity specialist Wolseley's primary focus is mid-market companies - those with an annual turnover between $20 million and $100 million.

"That's our investment philosophy. It's a space we understand," says Mr Richardson.

He says not all private equity solutions are about 100 per cent buyouts, but the status quo remains: "We have to be pragmatic and we have to be commercial."

"The people we are dealing with are very competent individuals. They need to have taken their business to where it is (turnover of approximately $40 million).

"We like to put in between $10 and $15 million dollars with investment returns over three to five years. It suits the medium-term investor," he says.

"We look to grow a business to scale and get them ready to list on the Australian Stock Exchange should that be the right way to go. The ASX is not an end point, but the beginning for a lot of companies."

Mr Standen, whose background includes working as in-house counsel for Billabong, says while private equity provides expansion capital and opportunity for exit, it co-exists with capital raising via debt - ie, financial institutions.

"Debt and private equity live quite comfortably alongside one another. While debt is reasonably cheap, it comes with cash flow issues and lenders are required to get interest and security," he says.

Mr Standen points to the leveraged Qantas equity deal as an example. While private shareholders proposed to tip in about $3 billion for the takeover, about $7 billion was to come from the banks.

"Private equity is a little bit more patient than debt. A return is based on three to five years and there is less worry about cash flow - and more emphasis on maximising profit," he says.

"It will typically gear transactions to 50 to 60 per cent, investing for a three to five-year time horizon. A number of Gold Coast businesses have benefited from private equity, most notably the Riviera group."

Private equity will typically look for a growth business with strong cash flows. Growth may come from increased market penetration, new products, new geographic markets or turning around a poor-performing business.

However, it's important potential companies look for more than just cash when choosing a private equity partner. Industry knowledge, relevant product or geographic market experience and contacts and relationships that can add value to the business also are key considerations.

"The difficulty for the owner is gaining the right access to the right people. Private equity is all about people - we deal with people we can really get along with," says Mr Richardson.

"We understand the dynamic of growing a business because all the partners at Wolseley have owned and grown businesses themselves. A business owner will usually approach a lawyer or accountant and have a discussion about the future of the company - finding out who's who in the private equity zoo'."

Mr Standen agrees, citing business relationships as the key to the future success of companies involved.

Private equity's public appeal