To assess where the private equity business in Australia is headed, let’s first look at where it’s been and where it is now.
Australian private equity emerged in the mid-to-late 1990s with what now looks like a laughable $12 million in early capital raising. Institutions and other large investors simply had never invested in the space before, and it took time for them to become comfortable with it. Over time, of course, they did, and in the first quarter of 2022 a record $3.6 billion was raised, more than in all of 2000. Throughout this period of growth, the industry has delivered internal rates of return of 15% to 25% within a fee structure — a 2% management fee and a 20% performance fee or carry — that has remained remarkably consistent. And while private funds were very specific in their purpose in the early days, Australian funds today invest broadly, covering a wide range of industries, time horizons, and asset classes.
Where Australian Private Equity Is Headed
Currently, an unprecedented level of capital or dry powder is available across the industry. That’s good and bad. The ready availability of capital has put pressure on valuations, but it also means that private equity leaders can spend less time trolling around to raise capital and more time on their growing businesses. The real issue is trying to find good staff. It’s a problem that appeared first in Silicon Valley and has spread around the world. As a result, Australian private equity business are likely to focus more on smaller deals in the future because they are likely to encounter fierce competition from large international players on the bigger deals. In fact, one or more local players could possibly be acquired by one of those giants.
Another possible change may come in the area of lock-ins. Traditionally, private equity operated within a 10-year period. That time horizon is likely to shrink. For many investors, especially retirees and superannuants, that is simply not attractive. Instead, we are likely to see funds that do valuations monthly and are continuous, allowing investors to reinvest distributions and enjoy compound growth.
Increased Liquidity on the Horizon
We’re also likely to see more liquidity. In the not-too-distant future, if an investor has $50,000 in an infrastructure fund, for example, and has a life event that triggers a need for cash, many fund sponsors themselves will likely be willing to provide the liquidity. In addition, we are now seeing secondary market platforms in the market that will allow investors to cash out and new investors to take existing stakes.
Also on the horizon are more “theme” funds. Investing exclusively in businesses involved with a single issue — sustainability, agribusiness, or blockchain, for example — some of these specialized funds with a narrower focus already exist. They are likely to grow to meet the appetites and interests of investors.
Finally, public awareness and acceptance of private equity as an investment class continues to grow. A wealth advisor from an international group I spoke with recently recommends that his clients have up to 20% in private markets. Three years ago, 5% would have been the maximum allocation most advisors would suggest. Much has changed.
About Richard Gregson
Richard Gregson is a Director of R P Gregson & Co. Pty. Limited, an Australian family office. He was formerly a Partner of Equity Partners, a firm he co-founded in 1995, and in which he transferred his ownership stake to junior partners in 2009. Dr. Gregson has over 30 years’ experience in venture capital, private equity, and private company management, having helped to create the Australian Private Equity and Venture Capital Association (now known as the Australian Investment Commission) in 1992, serving as its first Chairman, and remaining on its Board until 2002. He has served as Managing Director at Hambro-Grantham Management, which was later acquired and renamed Colonial First State Private Equity. He has been a director of three private-equity investments that listed on the Australian Stock Exchange and currently consults to the private equity industry and advises Horizon Advisory Services Limited on an ad-hoc basis.
This financial industry article was adapted from the GLG Roundtable “The Changing Face of Private Equity Australia.” If you would like access to events like this or would like to speak with financial industry experts such as Richard Gregson or any of our approximately 1 million industry experts, please contact us.