Asia’s Private Equity News Source avcj.com February 17 2015 Volume 28 Number 07

EDITOR’S VIEWPOINT Big firms target smaller Australia investments Page 3

NEWS Actis, Bain, Creador, Fosun, IDFC, Lightbox, QIC, Sequoia, Unison, Unitas, Page 4

INDUSTRY Q&A Michael Weaver of SunSuper & Neil Stanford of HOSTPLUS Page 11 Pacific Equity Partners’ Simon Pillar on buyouts Page 15 Made to measure? INFOGRAPHIC Australia PE deal flow Australia’s LPs want to customize their local middle-market exposure Page 7 Page 19

FOCUS FOCUS

A digger downturn Help from on high Commodity prices drop, PE sees openings Page 12 Australia VC receives government support Page 16

PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND FORUM AUSTRALIA 2015 HAPPY HOLIDAYS TO ALL OUR READERS! AVCJ WILL RETURN MARCH 3, 2015 Anything is possible if you work with the right partner

Unlocking liquidity for private equity investors www.collercapital.com London, New York, Hong Kong EDITOR’S VIEWPOINT [email protected]

Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 Downsizing Winnie Liu (852) 3411 4907 Creative Director Dicky Tang Designers HAS COMPLETED TWO crisis peaks – and nor should it, given a fair share Catherine Chau, Edith Leung, buyouts in Australia in the last five years. The of transactions from that period performed Mansfield Hor, Tony Chow first was a classic large-scale affair as accounting poorly – but at least 10 investments have been Senior Research Manager software firm MYOB was acquired from Archer completed in each of the last five years. Helen Lee Capital and HarbourVest Partners for around The fact that larger GPs are pushing down Research Associates $1 billion in 2011. Three years later the PE firm into areas that are below their normal check Herbert Yum, Jason Chong, Kaho Mak completed another secondary buyout but with a size underlines the impact of Australia’s robust far smaller ticket size: Boost Juice Bars was picked public markets. Companies of a certain size have Senior Marketing Manager Sally Yip up from The Riverside Company for an enterprise found that they can raise capital through an IPO Circulation Administrator valuation of approximately $170 million. at a higher valuation than they would get from Prudence Lau Bain is not alone in dipping into deals that are a private equity firm. Another group is already Subscription Sales Executive smaller than those readily associated with global listed and may no longer be under pressure Jade Chan and regional buyout firms. A number of domestic to consider privatization offers, while a third Manager, Delegate Sales firms are doing it too: last year Archer Capital isn’t a genuine public markets candidate but Pauline Chen

bought outsourced flight support services the owner’s valuation expectations have been Director, Business Development provider from Next Capital for an enterprise influenced by the wider frenzy. Darryl Mag valuation of less than $200 million. By contrast, smaller players are some distance Manager, Business Development Scan a list of Australia private equity away from even considering an IPO. Governance Anil Nathani, Samuel Lau investments from the last few years and one not structures must be put in place, consolidation Sales Coordinator only finds big name firms in surprisingly small plans executed to create sufficient scale, older Debbie Koo transactions, but also an explanation as to why or unsuitable executives transitioned out and they are doing it. replaced by highly professional teams. Once Conference Managers Jonathon Cohen, Sarah Doyle, In 2006 and 2007 there were seven deals these goals have been achieved and profitability Conference Administrator worth $1 billion or more. Since then, with the proved does an exit loom into sight. Amelie Poon exception of 2010, there have been no more than The public markets cannot retain their Conference Coordinator two in any one year. Six of the 10-strong billion- momentum forever – indeed, there are already Fiona Keung, Jovial Chung dollar crowd, including the top three, involved signs that confidence is wearing thin – and the Publishing Director ports, roads and utilities. These assets are the big private equity firms will duly re-focus on deals Allen Lee preserve of specialist infrastructure investors and more commensurate to their fund sizes. Until institutions in search of long-term, stable returns. then, though, they have the unusual pleasure The $500 million to $1 billion space, though of rubbing shoulders with their smaller local more active in the last few years than at any time brethren. Incisive Media Unit 1401 Devon House, Taikoo Place before, is patchy and there remain large helpings 979 King’s Road, Quarry Bay, of infrastructure assets. Hong Kong T. (852) 3411-4900 By contrast, between $100 million and $300 Tim Burroughs F. (852) 3411-4999 million there is much more consistency. Deal flow Managing Editor E. [email protected] URL. avcj.com is not about to recapture its pre-global financial Asian Venture Capital Journal Beijing Representative Office No.1-2-(2)-B-A554, 1st Building, No.66 Nanshatan, Anything is possible Australia PE investment Chaoyang District, Beijing, People’s Republic of China 20,000 250 T. (86) 10 5869 6203 F. (86) 10 5869 6205 E. [email protected] if you work with the right partner 15,000 200

10,000 The Publisher reserves all rights herein. Reproduction in whole or Deals in part is permitted only with the written consent of US$ million 150 AVCJ Group Limited. 5,000 ISSN 1817-1648 Copyright © 2015

0 100 2006 2007 2008 2009 2010 2011 2012 2013 2014 No. of deals Amount (US$m) Unlocking liquidity for private equity investors Source: AVCJ Research www.collercapital.com London, New York, Hong Kong Number 07 | Volume 28 | February 17 2015 | avcj.com 3 NEWS

China taxi-booking to an increase from 16% to 29% for US pension GLOBAL funds, 16% to 28% in Switzerland, 13% to 22% in platforms to merge Canada and 7% to 15% in the UK. Greenhill to buy Didi Dache and Kuaidi Dache, China’s two largest taxi-booking platforms, have agreed to merge, VC to benefit from investor secondaries advisor Cogent creating one of the largest companies of its kind Boutique investment bank Greenhill & Co. in the world. The combined entity is expected to visa scheme change has agreed to buy Cogent Partners, a global be worth around $6 billion. The Australian government plans to change financial advisor specializing in the private equity With Kuaidi’s Chuanwei Lu and Didi’s Wei the current rules for its Significant Investor Visa secondary market, for up to $97.6 million. Eight Cheng serving as co-CEO, the two companies (SIV) program in order to boost local start-ups. Cogent managing directors will join Greenhill, will still operate independently under separate Offshore investors would have to allocate to including Singapore-based Dominik Woessner. brands but will combine resources and personnel venture capital funds a minimum of 20%, or with a view to building a stronger platform. A$1 million ($770,000), of the aggregate A$5 The merger aims at global expansion. Lu said million investment that is required to qualify for ASIA PACIFIC Australian permanent residency after four years. Over 60% of Asia PE execs GREATER CHINA expect salary hike Growth in the Asian private equity industry Club Med battle ends with has led to higher pay expectations among industry participants, with 64% of professionals Fosun victory anticipating an increase in their 2015 base salary Shareholders in French vacation resort operator compared with last year, according to a survey by Club Méditerranée (Club Med) have accepted a executive search firm Heidrick & Struggles. Just EUR939 million ($1.1 billion) takeover offer from 38% of respondents said they received a pay rise a consortium led by China’s Fosun International, in 2014. in the statement that mobile internet offers the bringing the longest takeover battle in French best chance for Chinese transportation services history to its conclusion. The consortium made Monument hires platforms to expand into international markets. a sweetened offer in December, valuing the More details about the plan are expected to be company at EUR24.60 per share – EUR7.60 higher Amundsson in Hong Kong announced next week. than its initial bid two years ago. Monument Group has hired Niklas Amundsson, Kuaidi Dache, backed by Alibaba Group, raised formerly of MVision, as a managing director in its a $600 million round of funding last month led Warburg exits China Tulip Hong Kong office, which officially opened early by Softbank and existing backer Tiger Global last year. Amundsson spent seven years with Management. This followed a $700 million round Media via trade sale MVision, most recently as a partner, supporting completed in December for Tencent-backed Warburg Pincus has fully exited Chinese outdoor capital-raising activities by GP clients in Asia. Didi Dache, which won support from Temasek advertising firm Tulip Media Corporation Holdings, DST Global, GGV Capital and other following an acquisition by Shanghai New investors. Culture Media Group. The PE firm sold its 19.14% AUSTRALASIA Didi and Kuaidi are primarily digital stake – or 32 million shares – for RMB230 million intermediaries for taxi companies in China, but ($37 million) in cash. Shanghai Yidezeng Equity QIC raises initial $528m for both have expanded into private car booking Investment made a partial exit, swapping its services later last year. This puts them in direct 0.88% stake for RMB10.6 billion plus shares in infrastructure fund competition with ride-hailing platform Uber and New Culture Media. QIC, an investment manager controlled by local incumbent Yongche. the Queensland government, has secured La Chapelle invests in initial commitments of $528 million from four institutional investors for a global infrastructure brings the total capital raised by the company to e-commerce platform fund. The investors include an Asian sovereign A$40 million. Shanghai La Chapelle, a PE-backed ladies apparel wealth fund and a major Australian pension manufacturer that listed last year, has invested scheme. Australian LPs most RMB200 million ($32 million) in Hangzhou Anshe aggressive on alternatives E-Commerce, the business behind Chinese Biotech start-up raises online fashion retailer QiGeGe, in exchange for a Australia’s superannuation funds have been the 54% stake. Set up in 2001, La Chapelle designs, $20m Series B round most aggressive of the major global pension markets and sells clothes through retail stores. Vaxxas, an Australian biotechnology start-up players in developing alternatives exposure over developing a novel vaccination platform, has the last 10 years, according a Towers Watson Heaven-Sent in $32m raised a A$25 million ($20 million) Series B round study. Allocations to real estate, hedge funds, of funding from a group of new and existing private equity and commodities came to 26% in media investment investors led by OneVentures. This new funding 2014, up from 10% a decade ago. This compares Chinese private equity firm Heaven-Sent Capital

4 avcj.com | February 17 2015 | Volume 28 | Number 07 When Rebalancing is your First Priority, Make Lexington your Secondary Priority.

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has invested RMB200 million ($32 million) in Unitas Capital’s Korea team 2008. The former will make a 2.2x return on a full Great Wall Movie and Television, a Shenzhen- exit while the latter will continue to hold a 40% listed television and movie producer. The to spin out interest in Green Infra. company is issuing 57 million shares at RMB17.26 Unitas Capital’s Eugene Suh and Jay Lee will spin apiece, for a total consideration of RMB875 out to raise a Korea-focused fund. They will take Sequoia, Matrix back million, from six investors. the four-person Seoul-based team with them. They will depart on April 15, although some doctor search site portfolio monitoring responsibilities will be Sequoia Capital India and Matrix Partners NORTH ASIA retained. The change means Unitas’ fourth fund - have invested $30 million in a Series B round expected to launch at some point this year - will of funding for Practo Technologies, an Indian Bain to pay $421m for concentrate exclusively on cross-border and start-up that provides a search portal matching China opportunities. patients and doctors. The company also runs Japan hot spring chain The decision is said to be in part personal, Practo Ray a software-as-a-service for managing Bain Captial has agreed to buy Japanese hotel with Suh and Lee, CIO and partner at Unitas, patients’ records. and spa operator Ooedo-Onsen Holdings for respectively, both keen to settle in Korea. JPY50 billion ($421 million), including debt. They will join a small but growing number of Lightbox leads $20m round Ooedo-Onsen runs a chain of 29 traditional inns independent GPs in the country’s buyout space, and hot spring spas nationwide. for India QSR chain Lightbox Ventures has led a $20 million Series B Unison to exit wine retailer round of funding for Faaso’s Food Service, a tech- enabled quick-service restaurant (QSR) chain Enoteca to Asahi based in India. Existing investor Sequoia Capital Unison Capital has agreed to exit wine retailer also took part in the round, which comprises $16 Enoteca to brewing giant Asahi Group. The terms million in equity and $4 million in debt. of the deal were not disclosed. AVCJ Research data show that Unison acquired a 96.3% stake Creador invests $16.2 m in Enoteca - which was previously listed on the second section of the Tokyo Stock Exchange – in Ashiana Housing a $73 million take private transaction in 2011. Southeast Asia and India-focused GP Creador which has delivered substantial deal flow in dollar has paid INR1 billion ($16.2 million) for a minority App monetization platform terms in recent years. stake in Ashiana Housing, a publicly-listed Indian Unitas raised $1.59 billion for its second pan- property developer. Ashiana has delivered raises Series C round Asian fund in 2005 and all the investments have over 10.7 million square feet of residential and Metaps, a Japanese start-up that provides an app been fully exited. In Fund III, which closed at $1.2 commercial space to date. monetization platform using artificial intelligence billion in 2008, all but one of the investments - (AI), has raised a $36 million Series C round and all the remaining portfolio companies - are of funding. Previous investors, multiple new China control deals or non-Asian companies SOUTHEAST ASIA Japanese investors and an undisclosed Silicon that were bought with a view to expanding their Valley VC firm participated in this round. presence in the region. These are often industrial Warburg to fund Indonesia businesses with a strong China focus. shopping malls INCJ to invest up to $27m Following the departure of Suh, Lee and the Korea team, there will be 16 investment Warburg Pincus plans to invest $125 million in research start-up professionals based in Hong Kong and Shanghai. into a joint venture with Indonesian property The Innovation Network Corporation of Japan developer Nirvana Development to build (INCJ) will invest up to JPY3.3 billion ($27 million) shopping malls in the country. The JV will focus in Quantum Biosystem (QB), a VC-backed The platform already has its first project – the on hypermarket shopping malls across second Japanese start-up that develops instruments 50.4 megawatt Tejuva wind project – under and third tier cities in Indonesia. The GP has an used to automate the DNA sequencing process. construction. On completion it will provide 800 option to invest up to an additional $75 million. Mitsubishi UFJ Capital is making an additional MW of capacity across several states. undisclosed investment alongside INCJ. NSI leads round for IDFC agrees partial exit marketplace SOUTH ASIA from India’s Green Infra NSI Ventures, the VC unit of Northstar Group, has IDFC Alternatives will make a partial exit from led Series A round of funding worth $8 million Actis invests $230m in Indian wind and solar power producer Green for Asian insurance and wellness marketplace Infra after Singapore-based Sembcorp Utilities CXA, alongside consumer and technology fund renewables platform agreed to pay INR10.6 billion ($167 million) for a F&H and healthcare investor BioVeda. Singapore- Emerging markets-focused UK GP Actis is 60% stake in the asset. The selling shareholders based CXA is a platform through which investing $230 million to create an Indian are IDFC Private Equity Fund II and IDFC Private employees can select a mix of insurance and renewable energy platform – Ostro Energy. Equity Fund III, which incubated the asset from wellness services to suit their individual needs.

6 avcj.com | February 17 2015 | Volume 28 | Number 07 COVER STORY [email protected] Squeezed middle Several Australian superannuation funds are eschewing commitments to smaller domestic GPs because they have to deploy a larger quantum of capital. If more follow suit, what does it mean for the middle market?

TRENT PETERSON WAS LOOKING FOR up internal capabilities. However, he and others it going to managers. The four- deals. Two of the three founders at Catalyst are still to be convinced that this approach is year period that came immediately after saw Investment Managers, were stepping back and it sustainable. Super funds own large chunks of fundraising reach $9.4 billion, and half the capital was decided that, in the circumstances, it would Australia’s largest listed companies and they are went to buyout strategies. This does not include be imprudent to try and raise another blind pool setting the sights on more national infrastructure, captive funds launched by banks. fund. Peterson’s new approach was therefore to yet their support for growth-oriented private Tim Martin, a partner at Crescent Capital target companies in which LPs would commit companies could end up dwindling in relative Partners, estimates there were 10-15 players capital directly, with him serving as deal arranger terms. with fund sizes of A$200-800 million up until and asset manager. “The Australian institutional market is not as the global financial crisis. The number of About six months ago he identified SkyBus, supportive as it has, could and should be and participants in the space has halved as the operator of an express bus service between some of that slack is being taken up by overseas banks felt the pinch of regulatory restrictions Melbourne Airport and downtown, as a buyout investment,” says Neil Stanford, PE investment and underperforming independents couldn’t target. The opportunity was presented to a manager at HOSTPLUS. persuade LPs to re-up. number of parties, including some domestic “If everyone was doing 2-3 deals a year then superannuation funds, but Peterson’s partner A healthy development more deals were getting done than there are hails from overseas. SkyBus is now owned It is worth noting that super funds have scaled now, but when you look at the track records, by the newly-formed Catalyst Direct Capital back their exposure to Australian private equity some of those deals were questionable and Management (CDCM) and Canada’s OPTrust. over the last decade with good reason: their shouldn’t have been done,” adds Gareth Banks, Peterson describes Canadian institutional entire allocation to the asset class used to be managing director at CHAMP Ventures. “The investors as among the most advanced in the with domestic managers. “When I first came number of small and medium-sized enterprises world in terms of how they approach direct investment situations, coming to the table with Australia private equity fundraising by fund type a clear idea of “what they are good at and what they are not, where they need help and where 8,000 they do not.” By contrast, the Australian super 7,000 funds get short shrift. 6,000 “A couple of groups I spoke to about SkyBus said, ‘We’ve got a direct investment team so we 5,000 don’t see what your role would be in this deal.’ 4,000 The conversation finishes quickly from there,” US$ million 3,000 he says. “If you ask them later how the direct 2,000 investment strategy is going, the answer is it’s 1,000 generally not – or it’s really a co-investment 0 strategy. They are not putting much money to 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 work and the deals they see are often the ones Buyout Fund-of-funds Growth/pre-IPO Other every other PE firm has already turned down, so Source: AVCJ Research there is a significant risk of adverse selection.” The SkyBus transaction is said to have been valued at A$50-100 million ($39-78 million) – to Australia, our team would say there is no has not changed and the managers still classic lower-middle to middle-market territory manager selection here, all the investors are in operating are proven with long track records.” in Australia. Super funds are looking to make all the same funds,” says Marcus Simpson, head The likes of CHAMP Ventures, Crescent and their PE portfolios more global while at the same of global private equity at QIC, an investment all claim the competition time their asset bases are growing ever larger. manager controlled by the Queensland has eased while the opportunity set remains A few groups are unable to write checks small government. robust. They live on a diet of buyouts that enough for lower mid-market GPs, and with This resulted in a bloated middle market; usually involve founder succession planning or others expected to follow suit, it is unclear how strong returns allowed first-movers to scale up in partnering with management to scale a business domestic LPs will continue to access the space. fund size while others were drawn to the asset with a view to exiting it by trade sale or IPO. Direct investment is possible solution and class. According to AVCJ Research, between 1999 The alpha creation is there – arguably even Peterson sees himself as a conduit – perhaps and 2002, over $3.3 billion was committed to more so now the GP universe has thinned doing deals with super funds while they build Australia-focused funds, with more than half of out – and the investors participating in it are

Number 07 | Volume 28 | February 17 2015 | avcj.com 7 COVER STORY [email protected]

increasingly foreign. Australia’s lower-middle to making today still going to be substantial? size constraint and this approach is under middle market is occupied by managers with As it stands, Future Fund and AustralianSuper consideration by HOSTPLUS, for example, which funds of A$350 million to just under A$1 billion. are said to be the only domestic LPs that struggle has historically been heavily dependent on Quadrant is at the top end of the range, having to write checks of less than A$150 million. The fund-of-funds. raised A$850 million for its seventh fund last former has A$109 billion in assets and only two One way or another, super funds are changing year, with half the commitments coming from Australian GP relationships; the latter, with A$78 how they access the asset class and they end up overseas LPs. This compares to one third in Fund billion under management, is known to have at different points on a direct investment scale: VI and zero in Fund V. decided against re-upping with certain domestic pure co-mingled fund LP; active co-investor Crescent closed its fifth fund last year at managers due to the need to deploy a larger alongside portfolio GPs; backer of managers on a A$675 million. The overseas LP contribution was chunks of capital. deal-by-deal basis; independent operator. around two thirds, up from 40% in Fund IV and However, the need to make projections based Part of the appeal is fee minimization. 25% in Fund III. on future capacity complicates the issue. Not all CDCM charges management fees and carried Each GP’s most recent fund were super funds are growing at similar speeds or are interest that are lower than industry norms to oversubscribed and calls for an increase in the at the same stages of development; it is possible reflect its different role, but Peterson cautions hard cap were resisted on the grounds that it that for every commitment lost due to check size that some super funds don’t look beyond this risked moving away from the middle-market constraints more capital will come from smaller consideration. “When they say they want to sweet spot. The earlier decisions to open up players. Michael Weaver, private markets manager have a direct investment portfolio, if lowering to overseas LPs were made with a view to fees is at the core of that strategy rather than diversifying the LP base, not because there was increasing net returns, they are making a insufficient domestic support. “When they say they mistake,” he says. “Net, net it probably won’t cost them less, when you factor in they have a less Big and inflexible want to have a direct experienced team.” However, one of the reasons why other domestic investment portfolio, if Nevertheless, with fewer middle-market GPs, managers have struggled is that they must there are more managers willing to work under compete for allocations against global peers lowering fees is at the a for-hire arrangement, although it is difficult to within the super funds’ international programs. identify many deals that have come out of this Rules that required many super funds to maintain core of that strategy approach. a minimum level of exposure to Australian PE rather than increasing Since its inception in 2004 – and in addition have been removed. to serving as replacement GP on ABN AMRO One group has 4% of its portfolio in private net returns, they are Australia vehicle – Allegro Funds has operated equity, and no longer encumbered by a 25% on deal-by-deal basis but is now in the process domestic target, looks at all opportunities on making a mistake” of raising a blind pool. This underlines the fact an even basis. Nevertheless, the super fund – Trent Peterson that every GP would rather manage a fund. may also end up overlooking smaller local GPs And although deal-by-deal means no fees are not on grounds of quality, but because its asset charged on uncommitted capital, it does not base has grown too large. Given PE’s drawdown at SunSuper, expects domestic allocations to fall necessarily benefit the LP. Managers may feel structure, investments are assessed in terms of in percentage terms but the dollar allocations will pressure to secure deals quickly, while a buyer the expected size of the super fund five years remain the same or increase slightly. without an immediate source of capital has less from now. This forward forecasting means the At the same time, the industry is subject to credibility with sellers. minimum check size of A$75 million, based macro trends. First, there is a push for further “We have looked at these arrangements and on current assets, is smaller than then actual consolidation within the super fund community, there are a couple of things we struggle with,” minimum commitment. which will likely see the emergence of a smaller adds QIC’s Simpson. “If you do something on HOSTPLUS, which has a 5% private equity number of very large groups. Second, fees – a deal-by-deal basis you are concerned about allocation, is in a similar position. Stanford and the relative expense of participating in PE the longevity of the person you’ve gone into recently brought a proposal for a A$25 million compared to other asset classes – remain an partnership with and what sort of resources investment in a domestic VC fund before the issue and have prompted some groups to wind he can build around what he has. The other board of trustees and was immediately asked down their programs completely. consideration is that you might be a stepping why the commitment was so small. Although stone to raising a fund? Co-investments are ultimately approved, the investment is an A question of fees cleaner for us.” unusual one – and partly justified by the co- The fee debate also holds sway over one of QIC started co-investing in 2007 and these investment opportunities the fund is expected the routes through which super funds might transactions now account for about one to deliver. maintain exposure to Australia’s middle-market third of its portfolio by net asset value. More “There is a problem of deploying capital in GPs: fund-of-funds. recently, QIC also started taking direct stakes in sufficient sizes that it is economic given all the The feedback from many Australian LPs Australian middle-market companies, although work that needs to be done,” Stanford adds. “We is that they can no longer envisage entering so far as a minority investor supporting existing are growing at about 17% per annum. We are vehicles in which they have no discretion management teams. Last year it provided A$17 billion at the moment and there is talk that over manager selection, although they are expansion capital for Ostwald Construction we could be close to A$40 billion by 2020 and very much open to advisory relationships. Materials, a Queensland-based quarry and that is a big challenge. I have to think ahead to Separately managed accounts would go some concrete solutions business. five years from now – are the commitments I am way towards addressing the minimum check In this respect, QIC stands alone among

8 avcj.com | February 17 2015 | Volume 28 | Number 07 COVER STORY [email protected]

domestic LPs. The question is how many others mandate basis. LPs and GPs appear somewhat doesn’t see why domestic infrastructure should can do the same. Most super funds AVCJ divided as to where it goes from here. LPs be favored over private equity, arguing that quizzed on the issue have fewer than five people expect leading lower-middle and middle-market although infrastructure is perceived as a safe covering PE and no expectations of adopting the managers to remain a force in Australia – they haven it does not necessarily represent a better Canadian model. In addition to paying enough to will simply raise more capital from offshore – but risk-return bet than private equity. attract executives with relevant experience, they their relationships with the super funds may “The lower level involvement by domestic must hire enough of them to do the job properly change. The extent of this change depends on LPs is the product of being a little overweight – an active co-investor doesn’t necessarily have how prominent direct deals become. offshore or of having a broad program in the the resources in place to be a successful direct Simpson of QIC notes that his firm’s first past and seeing the failure of that program as a investor. investment of this nature was in a company that failure of the asset class rather than a failure in “You must also put in place the systems that had been courted by private equity funds. QIC’s their portfolio construction,” Darville says. “If the enable the executives to succeed. This includes ability to make a longer duration commitment current returns keep coming through, there will the right investment committee structure, the outside a traditional fund structure and the come a time when people want to get back in.” right philosophy and disciplines around making notion that its status might make it easier to Should this prove out, it is unclear how the decisions, and the speed at which decisions need source debt from local banks on favorable terms minimum check size issue can be resolved. For to be made is critical” says CDCM’s Peterson. “This appealed to the sellers. Despite this “hometown all but a select few super funds, it may be a case is currently at odds with the culture that resides advantage,” the firm still expects to work with GPs of finding a version of the fund-of-funds model in many of the Australian super funds.” as a co-investor most of the time. that works for them, such as a separate account, The cost of not creating a balanced approach The GPs, for their part, do not envisage super and swallowing any additional costs – because could be considerable: either due diligence funds emerging as serious rivals for deal flow. these would almost certainly be smaller than expenses run up during the course of processes Direct investment programs haven’t worked the sums required to set up a fully-fledged direct in which the super fund does not prevail, or in out particularly well in the past, and then the investment program. a worst case scenario, write-offs tied to poor performance of middle market funds is expected “The middle market is one third of Australia’s investments that blow up. to make the prospect of participating as an LP economy and if you are missing out on that you more enticing. should find a way to address it,” says Crescent In or out? Marcus Darville, a managing director at Capital’s Martin. “Alternative assets and PE in Several super funds claim to be considering Quadrant, recognizes that super funds will always particular should play a role in a superannuation or negotiating for-hire arrangements with have a substantial public markets exposure in fund portfolio, but it has to be on a returns- managers, either on a deal-by-deal or limited order to match assets and liabilities. However, he driven basis.”

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Wishing you a happy, healthy and prosperous Chinese New Year from the team at MVision

恭喜發財 恭賀新禧，祝身體健康、萬事如意。 MICHAEL WEAVER & NEIL STANFORD | INDUSTRY Q&A 恭喜發財 [email protected] Gong Xi Fa Cai The LP angle Michael Weaver, private markets manager at SunSuper, and Neil Stanford, investment manager for private equity at HOSTPLUS, discuss portfolio composition and performance

Q: How has the composition of exposure to a few local PE funds. how will you develop your your portfolio evolved from a However, as the super funds are resources to effectively private markets perspective becoming larger this means that manage them? over the last five years? while the domestic allocations WEAVER: Yes, we are actively WEAVER: We have significantly will reduce as a percentage, the co-investing alongside our increased our weighting to dollar allocations will remain the preferred managers though offshore markets in particular same or increase slightly. it does take more internal the US. Offshore exposure has STANFORD: This is already a resources to analyze the deals moved from around 30% of problem for some of the and consider whether or not the program five years ago to bigger super funds that now they are investments we should around 80% today. can’t feasibly make individual be seeking more exposure to. STANFORD: Five years ago the commitments less than A$100 STANFORD: HOSTPLUS has definite HOSTPLUS private equity million ($78 million) . This aspirations to participate in portfolio was almost exclusively makes it particularly difficult for co-investment deals in time and Michael Weaver fund-of-funds and the majority smaller domestic managers to we are certainly moving in that of this was invested with raise capital. While HOSTPLUS direction, but I am also realistic just two managers across 20 is growing strongly, this is that as a team of one we do not “We have separate funds. The unfortunate thankfully not an issue for us and yet have the bandwidth, nor the side effect of this is fact that we can be nimble. For example, internal investment processes, to significantly the fund has become over the fund recently backed deal with them properly. increased our diversified. We estimate that a A$200 million domestic we have exposure to more life sciences venture capital Q: What do you see as the major weighting to than 4,000 underlying portfolio manager. issues or areas of interest for companies. your funds from a private offshore markets 祝羊年， Q: Are you seeking more co- equity perspective? in particular Q: In terms of distributions, investment deals, and if so, WEAVER: Two key areas for us in 做人羊眉吐氣， which markets performed analyzing GPs are competitive the US. Offshore best in 2014? advantage and alignment. We 生意羊羊得意， WEAVER: The US market was “HOSTPLUS critically consider whether a GP exposure has strong for us in terms of has a real advantage over its moved from 前程羊關大道， distributions. However, we also wants to be a peers. This can sometimes be 煩惱羊長而去。 had a lot of Australian exposures more proactive more obvious in the US where around 30% of providing nice exits. there is more specialization of the program 羊年發羊財， STANFORD: Given that fund- investor in managers – for example, a GP of-funds still compose three private equity. focused only on healthcare five years ago 天天喜氣羊羊！ quarters of the private equity or on software buyouts – as asset class and the diversified It wants to get opposed to a more generalist to around 80% nature of their distributions, this approach, which is more closer to the today” – Michael Weaver Wishing you a happy, healthy and prosperous is not aspect that we currently common in Australia given focus on. ‘coal face’ of the shallower market size. Chinese New Year Our alignment concerns are a number of legacy processes Q: As the superannuation investments, but focused on whether the GPs that limit what we can do. We from the team at MVision industry and the funds are really motivated to seek the are exploring various options operating in it grow in size, the fund has a outperformance we need to such as separate accounts what does this mean for number of legacy justify private equity exposure and dedicated co-investment 恭喜發財 allocations to domestic for our fund. funds. It would be helpful to managers? processes that STANFORD: HOSTPLUS wants to understand how larger funds – 恭賀新禧，祝身體健康、萬事如意。 WEAVER: We expect most local be a more proactive investor such as those that are five years super funds will continue to limit what we in private equity. It wants to ahead of us in terms of growth move to a more global private can do” – Neil Stanford get closer to the “coal face” of – have tackled these sorts of equity focus though will keep investments, but the fund has problems.

Number 07 | Volume 28 | February 17 2015 | avcj.com 11 FOCUS [email protected] Panning the value stream In the midst of the commodities downturn GPs are still finding deals in mining services, although volatility can play havoc with execution. Better value might be found upstream, if you know where to look

WITH THE ANNOUNCEMENT IN DECEMBER high in 2011 of 111.9 points while base metals The relative attractiveness of mining service that Pacific Equity Partners (PEP) and Bain Capital peaked at 152 in 2007. As of late January, the companies also depends on where they enter had offered A$872 million ($731 million) for index price of both non agricultural commodities the mining life cycle. Broadly speaking, this mining industry supplier Bradken, there was a and base metals have dropped to 70 and 94, comprises four phases: exploration; construction; distinct possibility that Australia would see its respectively. development, where a company will put in a third mining services deal in as many months. “Many mining services businesses have tunnel or open the pit; and production, during Only weeks earlier had been hit hard by the change in the cycle but which ore is taken out the ground. Those mining agreed to buy the chemicals division of Orica, a intrinsically these cycles are difficult to call services firms worst hit typically serve the pre- supplier of explosives and blasting equipment to because their underlying drivers of both demand production phases. the mining industry, for A$750 million, while in and supply are so diverse, fragmented and global,” Boart Longyear, for example, provides drilling October Centerbridge Partners threw its support says David Grayce, managing director with Pacific services required at the very early stages of the behind a $352 million restructuring plan for Boart Equity Partners. “Public equity markets for mining cycle and has therefore seen business dwindle Longyear, which provides drilling services and services companies may have over-corrected.” as miners scale back exploration. Another equipment. Around the same time, it emerged However, simply targeting mining services company that falls into this category is The that would buy half for their lower valuations does not make Anywhere Group (TAG), a provider of temporary of maintenance services business of Leighton for sustainable investment plan. Instead, accommodation for the mining sector. It went Holdings, another mining industry services Grayce stresses the importance of looking for into administration in February of last year, owing provider. companies with a strong business model, a good Singapore-based Crest Capital Asia A$9.5 million But the transaction was not to be and by the end of last month PEP and Bain pulled the Commodities price index (SDR) plug, unable to obtain financing on acceptable terms due to the turbulent market conditions. 200 Bradken’s board noted that the offer had come at a low point in the mining cycle, with continued 150 price declines in iron ore and oil responsible for significant share price volatility in the services 100

sector. It sees no immediate evidence of a Points turnaround. The amount of activity in the past four months 50 alone seems to suggest that mining services companies are in dire need of capital, particularly 0 in Australia. However, the challenges that prevented the Bradken deal from going forward Mar 2004 Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014Dec 2014 indicate how difficult it can for private equity Non-rural commodiites Base metals firms to take advantage of these opportunities Source: Reserve Bank of Australia without assuming unacceptable levels of risk. Conventional wisdom dictates that mining services offer better insulation from price market position and the potential to grow profits ($8.4 million), less than a year after the pair volatility than exposure to the commodities through change in strategy, driving operational entered into the strategic partnership. themselves, but it is also a very diverse sector. As improvements independent of the commodity On the other hand, assets focused on prices continue to bottom out, GPs are exploring cycle. production activities rather than exploration how they can ride the wave of inevitable “Lower valuations – as many businesses are or development are more likely to be able to recovery. Not all agree that mining services will on the downward slope or in the trough stages weather the current storms. Arguably, the best be the best point of entry. of the cycle – will certainly get the attention way a GP can mitigate the impact of a downturn of private equity as well as other parties and in prices is by targeting businesses that are Appealing proxy? we will continue to see opportunistic offers,” exposed to commodity volumes as opposed to According to the Reserve Bank of Australia’s adds Nicholas Harwood, a partner with Deloitte commodity prices. Ideally, a portfolio company commodities index, prices of non-agricultural Australia who covers mining services. “That said, will have either scale, a broad service offering, commodities – which include base metals such it doesn’t change the fact that the underlying or occupy a position in a niche segment that as iron ore, copper and gold as well as bulk investment case and its associated returns still cannot easily be replaced. commodities such as coal – reached an all-time need to stack up.” On top of this, a strong management team

12 avcj.com | February 17 2015 | Volume 28 | Number 07 FOCUS [email protected]

and customer relationships underpinned by so mining services companies might be losing management from Gloucester Coal that will long-term contracts are deemed essential if a contracts and seeing fewer tender opportunities develop a portfolio of metallurgical coal assets potential target is to deliver the requisite returns but this does not necessarily correlate to industry across Australia, New Zealand and Indonesia. for private equity over a 3-5 year period. performance. Harwood notes that, over the last It is targeting small but potentially highly couple of years, Australian export volumes of profitable projects that are undeveloped, under Value chain pressure coal and iron ore have continued to increase, but construction or have just started production. This “You don’t have to be a genius to see that, when the Deloitte Australian Mining Services index for was followed in November by another platform the end-market pricing comes under pressure, the fourth quarter of 2014 points to a continued investment as Auctus Minerals received $130 the whole value chain comes under pressure, decline in market sentiment. Meanwhile, the million. Denham enlisted an experienced team because everyone focuses on efficiency and S&P/ASX 200 Index has improved. from Karara Mining to take on stalled mining needs to sharpen their pencil around their own projects around Australia. costings,” says Anthony Breuer, a managing Upstream opportunities Meanwhile, resources-focused EMR Capital director with Gresham Investment House. There are generalist GPs that are happy to invested in Highfield Resources – a listed company As a result, many PE players pursue participate in mining services but steadfastly that is currently developing three potash projects companies serving mines and infrastructure refuse to invest earlier in the value chain. This globally – in June, and more recently announced a operated by the global majors – Anglo American, territory is the preserve of specialists, for whom $450 million final close on its latest fund. BHP Billiton, Rio Tinto and Xstrata. While other the pool of opportunities goes deeper. Speaking to AVCJ earlier this month Bert Koth, managing director with Denham, said much of this activity was due a change in the whole “You don’t have to be a genius to see that, money-making paradigm in metals and mining. “Five or six years ago capital might go into when the end-market pricing comes under advanced exploration, but now you can only pressure, the whole value chain comes under create value by going into producing assets and at a late stage.” he says. “So where you once had pressure, because everyone focuses on efficiency longer holding periods and higher risk, now you have shorter holding periods and lower risk. It is and needs to sharpen their pencil around their positive for the industry because a lot of these companies are not viable and the management own costings” – Anthony Breuer teams are mediocre; they are just going to run out of cash and disappear from the market.” miners are closing capacity because they cannot “In the 25 years I have been doing this I have Jason Chang, CEO and managing director at afford to operate at current prices, there has never seen private equity as active as it is now EMR Capital, shares a similar view, noting that been an opportunity for larger players to increase as it is mining, particularly in the later life cycles the rewards are there for those with patient market share and so they are not scaling back of mining companies,” says Greg Evans, a partner capital. While falling commodities prices are production. The logic goes that is if capital is not and head of M&A at KPMG Australia. sending shockwaves through the industry now, committed yet then it makes sense to hold off According to AVCJ Research, private the longer-term outlook is brighter – especially until the market comes back; but if it is already investment into Asian mining reached $1.32 when one factors in growing demand from Asia’s in the ground and the operator has a low-cost billion across 22 deals in 2014. Australia emerging economies led by China and India. position, increasing output can pay dividends. accounted for over half the deals and $343 million “The medium- to long-term outlook for Australian Securities Exchange-listed Energy of the capital committed. The headline number mining assets is very positive so long as you Developments is a case in point. The company is heavily influenced by a couple of big-ticket target the right commodities in the right projects, provides distributed power to large, low-cost deals and the inclusion of oil and gas extraction and in the right countries,” says Chang. “We focus mines run by the global majors. According to investments, notably Blackstone’s $800 million the quality of the asset, the commodity, the scale Grayce, earnings have increased by about 70% commitment to Malaysia’s Tamarind Energy. of the potential upside, stable jurisdictions, and since PEP acquired the business in 2009, and by In 2013, the Australian impact was more cost structures. If you have those metrics right 15% in the past year. This is in part due to the pronounced but activity was comparatively then we think things look good.” company – supported by a capital expenditure muted. Australia was responsible for eight of nine As for mining services, many in industry program – consolidating its already strong deals region-wide and $103 million out of $443 also sound a positive chord. With less attractive market position. million invested. During the 2009-2012 period, projects falling by the wayside, demand may “It’s probably fair to say that if you are there was an average of 37 deals per year in Asia exceed supply sooner than most people expect, investing now – versus several years ago – you and 14 per year in Australia. which would help dig the likes of Bradken out of would probably be doing so in a business, and Evans stresses that while there may be relative their hole. It may not happen tomorrow, but the an industry, that has learnt a lot from its mistakes dearth of attractive opportunities in mining groundwork it is underway for the next up-cycle. and has been forced to become much more services, the same is not true of the mining sector “Eventually we will start to get increased efficient,” adds Deloitte’s Harwood. “Furthermore, as a whole. This past year alone has seen Perth- activity, mining services companies will be those that are still around now are the stronger based GP Denham Capital close two significant required again,” says KPMG’s Evans. “And while it ones; the weaker players are falling away.” investments within the space of six months. may not be boom from 2008 to 2012, the simple While mining services is a proxy, it is not The first deal, in May, saw the private fact is the mining industry is very resilient – it is always a complete one. In many instances, equity firm commit $200 million to Pembroke essential and necessary, not only for China but for producers are moving more activities in-house, Resources, a new platform formed by senior a lot of emerging countries.”

Number 07 | Volume 28 | February 17 2015 | avcj.com 13 De-risk your transaction with the market leaders in M&A insurance solutions

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LONDON I MELBOURNE I SYDNEY SIMON PILLAR | INDUSTRY Q&A De-risk your transaction [email protected] Opportunities down under with the market leaders in Simon Pillar, managing director at Pacific Equity Partners (PEP), on the prospects for buyouts in Australia, selling assets to strategic buyers in Asia, and evolving LP attitudes towards co-investment

M&A insurance solutions Q: What has deal flow been like consumption to come back to change the trajectory of the over the past year? onshore. business. These types of situation A: The first half of 2014 was are generally not interesting to extremely robust but we saw Q: What does the downturn in overseas trade buyers. But if we less in terms of what we actually the commodities cycle mean can get hold of that asset, put got done – there was a lot of for your exposure to mining in the capex, bring our strategic bolt-on activity, but nothing services? and operational toolkit to bear from a primary perspective – A: Despite iron ore and coal prices and set the company on a strong and there are two reasons for coming off dramatically, the profit trajectory, several years on that. One is we saw a more volumes being mined by the it is a very different proposition nuanced process on the part of likes of Rio Tinto, BHP Billiton for an overseas trade buyer. vendors; the gestation periods and Xtrata are actually going up. There is definitely more interest Risk Capital Advisors (RCA) is the market leader in advising on and structuring insurance solutions for on deals became longer than in They are low-cost producers on a out of Asia in Australasian assets transaction risks. With a wealth of experience across Asia-Pacific and an impressive track record of successful previous cycles. The other issue global basis and, as other miners “In the first and it presents an opportunity to transactions, the RCA team provides expert, commercial advice on a range of transaction risk strategies and is that the public markets have around the world close capacity shape assets in a way that makes been very strong. Although because they can’t afford to them more relevant to these insurance-based solutions. quarter of this a lot of the assets we look at operate at current prices, there buyers. In the case of Griffin’s are not relevant from a public is a share grab opportunity. If year we are Foods, we were developing a As the largest team in Asia-Pacific, RCA has a combined 60+ years of Private Equity, M&A and insurance markets perspective, it creates capital is not committed yet then distribution joint venture into experience, and is the preferred advisor to structure transaction risk insurance solutions. an expectation in the minds of it makes sense to hold off until seeing some China and had some exports vendors on pricing. The markets the market comes back, but if positive signs in into the region, and URC was In the past 5 years, RCA has successfully advised on and closed more than 400 transactions, making RCA the are holding up quite strongly capital is already in the ground – interested in how it could use but there is more nervousness and you’ve got the fixed costs of terms of more its own base to broaden the most experienced team in the Asia Pacific region. out there in terms of how a mine anyway – you may as well business further. long it is going to last. In the ramp up production. For mining transactions” The transaction risks we provide advice on include: first quarter of this year we are services companies leveraged to Q: How are LPs’ attitudes to co- Warranties & Indemnities seeing positive signs in terms of the production cycle rather than market is “shut” – if we have good investment evolving? Tax the probability of transactions the exploration cycle, it is not a product we can bring it to the A: When we raised Fund IV in getting done. bad place to be. Clearly there is institutions and have a sensible 2008 we were able to raise a Litigation pricing pressure because miners dialogue about whether we can supplementary vehicle alongside Prospectus Liability Q: To what extent are shifts in are trying to find ways to cut list it. In the case of Spotless and the main fund because, although Environmental Australia’s macroeconomic costs at every point, but volumes Veda Group, because of the size there were LPs doing co-invest, Contingent Liabilities position a concern? are going up. of those assets, we necessarily it wasn’t a large part of their A: We are focused on the 80% needed to keep stakes in the programs. We have moved of the Australian economy Q: Thanks to the strong public businesses that are pretty away from the blind pool that is driven by domestic markets, two PEP portfolio material. That has signalled supplementary fund product consumption and the outlook companies have done IPOs positively to the market. because LPs’ capacity to do For more on how RCA can help contact Rick Glover on +61 401 123 235, there is pretty good. What in the past 18 months. How co-investment has changed the Reserve Bank of Australia dependent are you on this exit Q: You have also sold assets dramatically over the last [email protected] or visit RiskCapitalAdvisors.com is trying to do in terms of route and how do you manage to buyers from China, the 5-6 years. However, there are offsetting the reduction in its perceived volatility? Philippines and Europe. What different types of co-investor. mining capital expenditure A: About 55% of our exits have does this say about the trade You have large guys who are through lower interest rates is all been to strategics, 40% listings sale market? co-underwriters and want to be about stimulating consumption, and 5% secondary sales. There A: The assets that we acquire tend genuine partners in the business so that’s a positive. The drop in has been a general view the to be market leaders in Australia from day one with board oil prices is significant in terms of market is either “open” or “shut” and New Zealand that have seen representation. Another group the extra discretionary spending for listings, particularly PE-backed lacklustre growth over the 2-3 that wants to be engaged in due it creates. And then the listings. What we have tried to do years prior to our purchase. They diligence but are happy to leave reduction in interest rates is also in this cycle is to give institutions require a big capex program running the governance process bringing down the Australian a very positive experience so that or other substantial strategic to the GP, and then a third group LONDON I MELBOURNE I SYDNEY dollar and encouraging more even in a down-cycle – when the or operational transformation is very passive.

Number 07 | Volume 28 | February 17 2015 | avcj.com 15 FOCUS [email protected] Policy permutations Plans to reinstate tax breaks for Australian start-ups that issue share options to staff rather than pay sizeable salaries has cheered VC investors. They are generally positive about the government role in fostering innovation

PEER-TO-PEER (P2P) LENDING PLATFORM locked up in our superannuation funds,” says businesses collapsed almost overnight. Moneyplace has ambitions to replicate in Anne-Marie Birkill, general partner and executive Nick Abrahams, a partner at law firm Norton Australia what Lending Club has achieved in director at OneVentures. “The government should Rose Fulbright, likens the current tax system to the US. Founded by a team of senior bankers 15 play a significant role in creating an environment charging every person who buys a lottery ticket months ago, the business has yet to be officially that encourages such investment because of the just in case they win. Paying upfront tax for the launched because it is in the process of applying potential returns to the economy in terms of tax shares is unfair on start-ups because their success for licenses from local regulators. revenue and employment.” rate is relatively low; after several years of paying “We hope to have our licensing result in the next couple of months, and then we should be Australian VC investments able to launch in April or May. But we actually don’t know. The regulatory environment in 600 100 Australia is very rigid,” says Stuart Stoyan, founder 500 and CEO of Moneyplace. While he accepts that some level of 400 government oversight is necessary in the P2P 300 80 A$ million lending space, Stoyan – who is also a member of Companies 200 the Productivity Commission’s roundtable that is studying support systems for start-ups – rejects 100 the notion that online lending platforms should 0 60 be forced to abide by the same laws as traditional 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 banks, for example. A graduated approach is No. of companies Amount (A$m) preferable to foster the development of new Source: Australia Private Equity and Venture Capital Association (AVCAL) businesses. Entrepreneurs and venture capitalists can readily identify where government policy drives Valuable options? tax on options, the holder could one day find forward or holds back innovation and what this ESS is used to attract talent to companies they were suddenly worthless. means for the start-up ecosystem. that might not yet have the revenues to offer The issue is serious enough to make founders A significant hole in this ecosystem significant wages. The system is familiar to consider relocating to jurisdictions where tax appears close to being plugged following an entrepreneurs in many countries. In the US, for treatment is more favorable. “Especially when announcement last October that the tax code example, the stock options awarded in lieu of those founders are creating a company that so that paying employees in stock options under cash are only taxed when shares are sold or the addresses opportunities in a global market, they the employee share scheme (ESS) is an incentive options exercised. won’t choose to be in Australia. They will go to the US or other countries where the technology infrastructure and tax regime are better,” “Every single start-up that I know uses the R&D Moneyplace’s Stoyan says. In order to stem this brain drain, the tax credit to get an extra 3-4 months to runway, government plans to re-introduce tax breaks for sometimes more. The policy is really, really ESS, effective July 1. Under the new proposals, eligible start-ups would be able to offer shares important to the start-up community” – Rick Baker or options to employees at discounted rates without having to pay tax upfront. Eligibility depends on having an aggregate turnover of less rather than a financial burden. For anyone Australia had a similar approach until 2009 than A$50 million, being unlisted and having less seeking capture the size of the gap between when the then Labor administration unveiled than 10 years of operational history. Australia and Silicon Valley in terms of nurturing measures intended to save A$200 million over The government will extend the maximum technology start-ups, this was a huge red flag. four years by preventing executives earning time for tax deferral from seven to 15 years, “We need significant reform of the legislation more than A$180,000 per year from minimizing allowing start-ups more time to succeed. And around the ESS, so we can improve employee their tax exposure. Start-ups got caught in the options will be subject to capital gains tax rather participation in company ownership and fresh crossfire. As options were reclassified as income, than the higher income tax – a key benefit of the initiatives to stimulate investment in venture which meant they were taxed at the employee’s proposed changes, Abrahams says. capital, given the trillions of dollars that are marginal rate, many ESS adopted by small Not only will it become easier for technology

16 avcj.com | February 17 2015 | Volume 28 | Number 07 FOCUS [email protected]

start-ups to retain talent, but from a longer- with a remit to bridge the gap in between for domestic venture capital, new firms start to term perspective, these reforms are expected Australia’s medical research capabilities and its look elsewhere for support, notably US VC players to help create a new generation of successful ability to convert them into commercial benefits. and high net worth individuals (HNWIs). entrepreneurs. They are likely to follow the The fund was supposed to start functioning last The government recognized the role the example already being set by a handful of others month but the fine detail is still being negotiated. latter can play when it unveiled proposed and plow a portion of their wealth back into the On the other, Commercialization Australia, a reforms to the Significant Investor Visa (SIV) technology sector. grants program for start-ups, and the Innovation program last week. Through the program, “The change is good for the whole start-up (IIF), which sponsors VC funds, individuals can qualify for permanent residency ecosystem because it helps spread the wealth were both discontinued. in Australia after four years, pending local from just one or two founders to a wider group,” Founded in 1997, the IIF is a co-investment investment of at least A$5 million. At least 20% says Rick Baker, managing director at Blackbird scheme whereby the government licenses fund of this sum will now have to be deployed in Ventures. “In Silicon Valley the liberal use of ESS managers and provides capital for investment domestic venture capital funds. Official figures sustains contributions to that ecosystem. If which must be matched at an agreed ratio by show that nearly 1,500 applications have been we don’t have a good ESS in Australia and just private sector LP commitments. It has served approved since SIV’s launch in 2012, with concentrate the wealth generation among a as a cornerstone LP for a number of first-time Chinese investors making up 90% of successful small numbers of people, the ecosystem has less managers. OneVentures, which is currently applicants. chance to grow and blossom.” looking to raise A$100 million for its second AVCAL endorsed the move, saying it will VC fund, previously raised capital from the IFF. lead to a bigger pool of funding for local Different needs The GP reached an A$60 million first close in entrepreneurs, although it is uncertain how The research and development tax incentive October. readily investors will commit to the asset class program has also played a critical role in keeping “The discontinuation of the IIF program is above the mandated 20% – venture capital skilled employees in Australia. If a business is able unfortunate because post-global financial crisis continues to be categorized as relatively high- to prove that R&D is used as an investment for we are in an environment where institutional risk. Looking at the environment through a wider future growth, it may qualify for a 45% refundable investors are by and large not investing in lens, however, there is evidence of increasing tax credit. venture capital,” says Birkill. “The program interest in start-ups. A total of 93 nascent “Every single start-up that I know uses the provided critical leverage to unlock private businesses received A$516 million from local and R&D tax credit to get an extra 3-4 months to runway, sometimes more. The policy is really, Australia VC fundraising really important to the start-up community. Not only does it give that extra runway, but it also 400 15 creates a relatively inexpensive place for local founders to hire software engineers and keep 300 12 their product development team in Australia,” says Baker. 200 9 A$ million Last week, the program arguably lost some Funds of its edge when the government announced 100 6 a cap of A$100 million on the amount of R&D expenditure that companies can claim as a tax 0 3 offset. For expenditure above that threshold, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 companies can claim an offset at the company No. of funds Amount (A$m) tax rate, which is higher. Brigitte Smith, founder Source: Australia Private Equity and Venture Capital Association (AVCAL) and managing director at life-science focused GBS Ventures, says that even with the cap, the vast majority of firms she invests in will be sector capital, which in particular helped first- global investors last year, the most since 2005 in unaffected because they are early stage. time managers to get new funds up. Australia’s dollar terms. “The R&D tax incentive is the most important VC industry is relatively small and immature Even though it has yet to enter operation, program to life science companies because they compared to other countries so programs that P2P platform Moneyplace is looking to bring a aren’t generating any revenue yet,” Smith says. stimulate investment are important for growing funding round forward to March on the back of “By contrast, ESS isn’t as important to them as it the industry.” strong soft demand from investors. The funding is to other sectors. It’s more about how policies was originally planned for the second half of the can facilitate more funding into the start-ups Foreign legion year. because life science companies are very capital Venture capital fundraising has struggled ever “Australia’s fundraising environment has really intensive. There isn’t enough VC funding available since the global financial crisis. According to come into its own over the past few years,” says in Australia right now.” the Australian Private Equity & Venture Capital Stoyan. “It is not as mature as markets like the Nevertheless, life sciences was one of few Association (AVCAL), VC firms raised A$158 US or Israel, but if I point to our own experience, perceived winners in the 2014-2015 “austerity million and A$100 million in 2010 and 2011, Moneyplace has been inundated with inquiries budget” that saw the government cut several respectively. In 2012, the total soared to $240 from a wide range of investors, including VCs, start-up support programs. million but a year later it was back at A$152 institutions, family offices and HNWIs. We’re On one hand, the A$20 billion Medical million and then reached A$120 million in 2014. seeing significant interest from some serious Research Future Fund (MRFF) was announced With superannuation funds lacking an appetite investors.”

Number 07 | Volume 28 | February 17 2015 | avcj.com 17 4th Annual Private Equity & Venture Forum Indonesia 2015 24 March, Grand Hyatt Jakarta

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Supporting Organisations

Scan this QR code with Join your peers your phone to access the avcjindonesia.com #avcjindonesia event website 4th Annual Private Equity & Venture Forum INFOGRAPHIC Indonesia 2015 [email protected] 24 March, Grand Hyatt Jakarta Large-cap drought? While deal flow in Australia’s middle market continues to be robust, there have been slim pickings among the big buyouts - and where there is activity it tends to be dominated by infrastructure

m m m m and above COLUMN$50-100 HEAD: $50-100M COLUMN$101-300 HEAD: $101-300M COLUMN$301-750 HEAD: $301-750M COLUMN$750 HEAD: $750 M AND ABOVE GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjindonesia.com Number of deals 15 15 15 15 Volatility, Opportunities and Jokonomics: 10 10 10 10 Deals Deals Deals Deals A new landscape for PE 5 5 5 5 0 0 0 0

2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

KEYNOTE We are delighted to announce that our Most active investors Ironbridge Capital CHAMP Private Equity Paci c Equity Partners ADIA comprehensive agenda now features a keynote (based on ADDRESS Quadrant Private Equity Quadrant Private Equity TPG Capital disclosed deals) Anity Equity Partners address by industry renowned speaker, Mr Sandiaga L Capital Asia Archer Capital Hastings Fund Management Archer Capital S Uno, Founding Partner from Saratoga Capital. Advent Private Capital ICG IFM Investors

Goldman Sachs Denham Capital GIC Private QIC

Taking place on 24 March 2015 in Jakarta, this 10 32 54 6 10 32 54 6 10 32 54 6 10 32 54 6 year’s agenda will adopt a lively and interactive Deals Deals Deals Deals format, addressing the significant potential as well Top 10 deals Date Amount Investee (sector) Date Amount Investee (sector) Date Amount Investee (sector) Date Amount Investee (sector) as challenges PE is facing in this unique but volatile (US$m) (US$m) (US$m) (US$m) Nov-10 100.0 Murchison Metals Mar-13 298.8 Australia Pacific Sep-13 733.8 Tourism Asset Apr-13 5,271.7 Port Botany market. Join local and regional private equity (mining) Airports Corp Holdings (real & Kembla (infrastructure) estate) (infrastructure) Jan-13 100.0 Becton Property leaders to debate whether Indonesia is still THE hot Group (real estate) Dec-10 286.1 Constellation Wines Sep-14 702.3 MLC Private Equity Nov-10 3,037.6 Queensland (consumer) - secondaries Motorways market in Southeast Asia and how deal activity can Dec-14 100.0 Sundrop Farms portfolio (financial (infrastructure) (agriculture) Aug-13 282.7 Sydney Airport Corp services) (infrastructure) Aug-10 3,023.2 Intoll Group be increased over the next 12 months. Oct-10 95.0 Meridien May-11 695.2 Ausco Modular (infrastructure) Retirement Villages Feb-13 278.7 Lend Lease Prime (non-financial (real estate) Life (healthcare) services) Jul-10 2,360.5 Healthscope Sandiaga S. Uno (healthcare) Jul-13 92.1 Scottish Pacific Jun-12 277.9 Genesis Care Mar-12 668.0 Transurban Group Benchmark (healthcare) (infrastructure) May-12 2,351.1 Sydney Desalination Founding Partner, For the latest programme and speaker line-up, visit (financial services) Plant (infrastructure) Aug-12 274.0 ClearView Wealth Nov-14 653.7 Orica - chemicals SARATOGA CAPITAL avcjindonesia.com Jun-11 88.5 Hastie Group (non- (financial services) business Nov-10 2,131.3 Port of Brisbane financial services) (infrastructure) Apr-14 250.3 Campaign Monitor (manufacturing) Aug-13 85.4 City Farmers Retail (technology) Mar-13 646.5 Nextgen Networks Sep-10 1,969.1 Alinta Energy Group (consumer) (energy) Registration: Yeni Kittrell T: +852 3411 4836 E: [email protected] Jun-11 246.9 Healthe Care (telecom) Oct-13 85.2 Estia Health Australia Sep-13 582.8 RiverCity Dec-13 1,679.6 Commonwealth (healthcare) (healthcare) Motorway Group Property Office Sponsorship: Anil Nathani T: +852 3411 4938 E: [email protected] Enquiry Fund (real estate) May-11 85.2 CatchoftheDay Dec-11 242.5 APT Allgas Energy (infrastructure) (technology) (energy) Dec-14 578.5 Leighton Holdings Dec-10 1,479.7 DP World Australia (infrastructure) Co-Sponsors Legal Sponsor Jan-11 83.0 Wellard Group May-12 233.2 South Australian - Leighton (agriculture) Schools PPP Contractors Services Aug-11 1,252.9 MYOB Holdings (infrastructure) (non-financial (technology) services) Oct-11 573.4 Veda Advantage (financial services) Oct-11 532.1 Primo Smallgoods Supporting Organisations (consumer)

Scan this QR code with Join your peers your phone to access the event website avcjindonesia.com #avcjindonesia Number 07 | Volume 28 | February 17 2015 | avcj.com 19 Comprehensive company information and business intelligence

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