Private Equity HORIZONS 2017

With the current exit cycle coming to an end for many sponsors, and large amounts of dry powder waiting to be deployed, we’re expecting an uptick in new investment activity in by private equity sponsors. There are some key trends and sectors to look out for in 2017. The Private Equity team at Allens reports. Sectors to watch Informed by discussions with financial sponsors 2017 2016 in Australia, across the region and in the US, Health Education Technology Agri ICT Health Consumer Financial Energy the sectors to watch in 2017 are: & retail services

HEALTH EDUCATION TECHNOLOGY AGRI & FOOD

Sponsors continue to demonstrate significant We have seen enormous demand for education Technology to keep users safe online, Australian sponsors have had a long track record appetite for Australian healthcare assets, services businesses. Opportunities continue to present digital verification technology and of investing in branded consumer food businesses. tempered only by the challenges in finding in tertiary student accommodation, early childhood anything cyber‑security related present real Pacific Equity Partners has led recent activity in this available acquisition targets amid intense learning centres and after‑school care. opportunities in ‘digital trust’, a growth space, with investments in Patties Foods and Pinnacle competition. Areas of specialised medicine area for our times. Businesses that have Bakery and Ingredients, as well as associated bolt-ons Sponsors are attracted to the opportunity to create such as radiology and oncology, where some broad data sets will present opportunities such as Allied Mills. We continue to see opportunities platforms from bolt‑ons and the operational expertise businesses remain under doctor ownership, to sponsors looking to exploit ‘big data’ and for private equity in this sector, as multinational that they can bring to bear on these assets; and are a focus for some sponsors. Others are other analytics opportunities. In particular, players look to rationalise their businesses and divest demand for quality accommodation continues to looking to take advantage of ever increasing the exploitation of information held by non-core assets. rise, underlined by increases in international student government and private sector healthcare financial services and consumer businesses numbers. This looks set to continue, thanks to Brexit spending by targeting pharmaceutical and will be something to watch. and US immigration policies. other products supplied to the industry.

Tom Story Emin Altiparmak Mark Malinas Mark Kidston Partner – Partner – Melbourne Partner – Melbourne Partner – Sydney

Allens deals Allens deals Allens deals Allens deals Advised the lenders to Quadrant on its Acquisition of Camp Australia, an Australia‑based Advised HRL Morrison and its clients CSC Advised Pacific Equity Partners on its acquisition of , Goodlife and outside of school hours care business by . and Infratil on their acquisition of Canberra acquisition of Patties Foods by way of Jetts gym businesses. Advised Goldman Sachs Special Situations Group Data Centres from . public to private scheme of arrangement. Advised on the sale of on its joint venture with Blue Sky Private Real Advised NSI Ventures on a Series B Advised Pacific Equity Partners on its HealtheCare to Luye Medical Group. Estate to establish a new student accommodation investment on Whispir Limited. acquisition of Allied Mills. platform. MORE NEW INVESTMENT ACTIVITY CHINA RESTRICTIONS ON DISRUPTION TO CREATE 1FOR PRIVATE EQUITY 2OUTBOUND M&A – AN 3 OPPORTUNITIES Following several years of strong exit activity, 2017 should OPPORTUNITY FOR PE Disruption in the Australian market looks to present Major be the start of a new buying cycle for many private equity The State Council of China is enforcing new some real opportunities for private equity in 2017. sponsors in Australia, utilising around $7 billion of funds restrictions on outbound foreign investment that We believe that significant changes in the market in reserve. With a relatively stable Australian economic seek to impose greater restrictions on Chinese buyers landscape in 2017 will continue to bring new trends environment, characterised by lower interest rates, healthy seeking to invest overseas in certain sectors. In the sources of demand for private capital and present debt markets and an Australian/US dollar exchange rate past two years, private equity sponsors have been novel opportunities for capital investment within in the 70 cents, we are expecting to see local and foreign outbid by Chinese capital on a number of assets in traditional industry sectors. The new vanguard of in 2017 financial sponsors become more active on the buy‑side. Australia, including in the auctions for Pacific Hydro, cross‑category e‑commerce retailers like Amazon We are seeing a number of new opportunities arising for Healthe Care and GenesisCare. and Alibaba pose a threat for traditional retailers and, with Australia now clearly on the radar of global private equity sponsors as both domestic and multi‑national These changes, which are largely driven by players, 2017 could see movement along the retail corporates look to rationalise their portfolios and dispose foreign exchange considerations rather than any distribution chain as private equity sponsors look to of non‑core assets. However, auction processes will remain fundamental policy shift from the State Council, are take advantage of new opportunities in the market. competitive throughout 2017, with continuing strong nevertheless likely to result in reduced competition competition from listed corporates and other strategic from Chinese capital. This is a development that will For example, with Amazon actively pursuing buyers seeking growth, as well as superannuation funds and be welcomed by private equity sponsors, particularly opportunities to vertically integrate ocean freight and sovereign wealth funds increasingly investing capital directly. global funds that are chasing opportunities at the inland parcel delivery to reduce reliance on third party There is a sense that private equity sponsors are being bigger end of the market. As a result of the proposed logistics providers, private equity sponsors could look squeezed by this competition for assets. However, private measures, we think that financial sponsors could to invest in similar businesses ahead of Amazon’s equity sponsors tend to thrive and outpace this competition see more opportunities in sectors that have been physical launch in Australia. when the asset or opportunity presents complexity (such as identified by the State Council as attracting higher Similarly, 2017 might also be the year that brings a carve‑out transaction or asset with complicated separation scrutiny and capital restrictions, including real estate, disruption to important, if often overlooked, fund issues, or more complex public‑to‑private transactions) or a hospitality, entertainment, movie theatre chains administration and back‑office functions. Recent platform to scale or expand into new markets (such as roll‑up and sports clubs. Chinese buyers have also been less media reports of the potential use of blockchain opportunities, or brand buys for expansion into China and competitive in transactions involving assets that technology designed to consolidate and automate other parts of Asia). typically connect well with private equity sponsors. the largely manual processes currently used by GPs, Quadrant Private Equity has been particularly active in These restrictions out of China are now also likely to administrators and other service providers offer making investments in this form, rolling up complementary slow Chinese bidding in competitive sale processes. a potential taste of the efficiencies that might be businesses to enter a market; for example, the recent play for offered by more coordinated use of data across the health club industry through the acquisitions of Fitness multiple back‑office roles within the industry. First, Jetts Fitness, and Goodlife Health Clubs. Similarly, Quadrant has targeted tourism with the acquisitions of The Ghan, owner Great Southern Rail, Cruise DEBT MARKETS TO HELP FUEL GROWTH Whitsundays and Rottnest Express. 2017 is also likely to see 4With the return of non‑Australian lenders (both bank and non‑bank) to the Australian market and a resulting increase deal activity from a new generation of Australian private in competition among financiers, the past 12 months has seen private equity sponsors benefit from the reduction or equity managers who have established new funds, including removal of amortisation requirements, greater flexibility for borrowers and a focus among bank lenders on securing names such as Potentia Capital, Adamantem Capital ancillary business from borrowers. and Odyssey Private Equity. It is a positive and welcome Underwriting appetite from banks will continue to be strong and private equity sponsors will take advantage of development for the Australian private equity mid‑market generous permitted acquisition baskets and accordion facilities under existing financing arrangements to finance that seasoned dealmakers have returned to investing and bolt‑on acquisitions. The growing presence of global sponsors in the Australian market will mean that there will be an are injecting new growth into the roster of Australian increased level of discussion on unitranche and term loan B facilities for the leveraged finance market. mid‑market GPs. We wish them well. Our deals in 2016/17

SPONSORS VENDORS

Bain Capital – advised on its acquisition of Camp Australia, an Archer Capital – advised on its $938 million divestment of Australia‑based outside of school hours care business. private hospital business Healthe Care to China’s Luye Medical CO‑INVESTMENT BETWEEN PE ARE OVERSEAS TAX CUTS Group. Pacific Equity Partners (PEP) – advised on its acquisition of AND SUPER FUNDS A THREAT? 5 6 Allied Mills, one of the country’s largest manufacturers and Zimmermann – advised leading luxury fashion brand While capital raising for funds from superannuation If the US administration’s plans to dramatically distributors of flour and bakery pre‑mixes. ZIMMERMANN on its next phase of growth with a minority and other Australian institutional investors generally reduce the US company tax rates go ahead, it will investment in the brand from General Atlantic, a global growth Pacific Equity Partners (PEP) – advised on its acquisition remains challenging for a variety of reasons (not be a potential game changer for the Australian tax equity firm. of Patties Foods by way of public to private scheme of least of which being the continuing focus in the landscape. While the UK has already scheduled arrangement. superannuation industry on costs of investments), we reductions in the company tax rate to 19% from April do think that 2017 may signal a rise in co‑investment 2017 and 18% from April 2020, the prospect of the The Future Fund Board of Guardians – advised Australia’s between private equity sponsors and super funds. US Administration reducing the rate to somewhere on numerous private equity FINANCIERS In particular, as the large Australian superannuation in the 20% range and imposing a US‑favoured border co‑investments across a range of sectors. funds continue on their path towards increasing adjustment tax has the potential to super charge the HRL Morrison – advised HRL Morrison and its clients CSC levels of internalisation of investment management, push for corporate tax reform in Australia. There are Anglo American Qld Coal Assets – advised the financiers on and Infratil on the acquisition of Canberra Data Centres from private equity co‑investment opportunities, both in doubts as to whether Australia could respond in the ’s ultimately unsuccessful bid for Quadrant Private Equity. Australia and offshore, are beginning to become more near to medium term with meaningful reductions the assets. attractive and realistic investment opportunities to the 30% company tax, which creates challenges Goldman Sachs Special Situations Group – advised on its joint Gyms (Fitness First, Goodlife and Jetts) – advised the lenders to for them. Working well with super funds and other and opportunities for private equity investment. venture with Blue Sky Private Real Estate to establish a new Quadrant on its acquisition of Fitness First, Goodlife and Jetts similar institutional investors on co‑investment Unless Australia can respond to the international student accommodation platform. gym businesses. opportunities may become an increasingly important competition on tax rates, the after‑tax return from deploying capital into Australian opportunities way for private equity funds to keep that investor Goldman Sachs Special Situations Group – advised on its equity Pacific Hydro – advised the lenders to Pacific Equity Partners on compares unfavourably with offshore opportunities. group engaged in the private equity market in investment in Evolution Healthcare. its unsuccessful bid for Pacific Hydro. Australia. If the US border adjustment tax is enacted, we can see capital being directed away from Australian Goldman Sachs Special Situations Group – advised on its exit Australian agribusiness – advised the lender to Belgian-based firms with significant exposure to the US market, from Swisse Vitamins and sale to Biostime. private equity fund Nomura on its acquisition of an Australian as the trading conditions of firms importing goods agribusiness. – advised Canadian based private equity into the US are expected to deteriorate. On the house Onex Corporation on the acquisition of the Intellectual other hand, the Australian MIT regime continues Lynch Group – advised the financiers to Next Capital on the Property & Science business of Thomson Reuters. to provide favourable after‑tax outcomes, and so financing aspects of its acquisition of the Lynch Group. the opportunities for private equity to partner with Pinnacle Foods – advised the lenders to Pacific Equity Partners foreign-based funds remain strong. on its acquisition of Pinnacle Foods.

Private equity funds – advised various financiers in putting together a number of capital call facilities to certain private equity funds.

An estimated $7B OF DRY POWDER is available Underground Cable Systems – advised lenders to Hawkesbridge Capital on its acquisition of Underground Cable Systems. for investment by Australian private equity and Blackstone’s acquisition of IXOM – adved JP Morgan on its Term fund managers, a 13% increase Loan B to fund Blackstone’s acquisition of IXOM, formerly the on last year. Orica Chemicals Business. ACTIVITY IN FUNDRAISING (A$bn) INVESTMENT (A$bn) DIVESTMENT AUSTRALIA 2016 1. Private equity 2. 3. fundraising VALUE OF DEALS (A$bn) FELL BY 15% in 2016 Largest deal value A$2.55bn Total private equity investment SINCE FY2008 A$12.8bn Repayment of preference grew to $3.33bn in FY2016, shares/loans A$2,17bn a 2% rise on 2015. 3

A$7.0bn IPO Sale of equity 4 post‑flotation A$4.3bn 11

However, the number A$0.933bn of companies invested Other in by private equity 6 fell to 60, a 30% Divestment by REDUCTION. FY14 FY15 FY16 FY14 FY15 FY16 trade sale 9

> Sources of new private equity & venture capital NUMBER OF DEALS A$3.33bn commitments A$3.28bn 32% DECREASE 63% of new commitments in number of deals came from OUTSIDE Number of companies exited AUSTRALIA in 2016 by private equity and venture capital fell to 42 (FY2016), 96 A$3.12bn 11 fewer than the FY2015 84

64 12% 38% Total private equity divestments 13% 33

32% FY14 FY15 FY16 FY14 FY15 FY16

All figures from AVCAL 2016 yearbook https://www.avcal.com.au/documents/item/1315 CONTACTS

Tom Story Mark Malinas Partner – Co Head of Partner – Co Head of Private Equity Private Equity T +61 2 9230 4812 T +61 3 9613 8485 M +61 404 024 526 M +61 409 389 789 [email protected] [email protected]

Emin Altiparmak Vijay Cugati Martin Fry Richard Kriedemann Partner – Sponsors Partner – Sponsors Partner – Tax Partner – Sponsors T +61 3 9613 8510 T +61 2 9230 4940 T +61 3 9613 8610 T +61 2 9230 4326 M +61 417 995 445 M +61 420 856 996 M +61 413 052 902 M +61 414 714 326 [email protected] [email protected] [email protected] [email protected]

Mark Kidston Tom Highnam Jo Folan Tim Stewart Partner – Finance Partner – Finance Partner – Finance Partner – Finance T +61 2 9230 4419 T +61 2 9230 4009 T +61 2 9230 4625 T +61 2 9230 4109 M +61 405 135 419 M +61 414 223 173 M +61 410 096 302 M +61 421 150 601 [email protected] [email protected] [email protected] [email protected]

Warwick Newell Noah Obradovic Apoorva Suryaprakash Jonathan Hoe Partner – Finance Senior Associate – Sponsors Senior Associate – Sponsors Senior Associate – Sponsors T +61 3 9613 8915 T +61 3 9613 8815 T +61 2 9230 4402 T +61 3 9613 8151 M +61 420 936 872 M +61 451 230 567 M +61 466 587 885 M +61 451 231 364 [email protected] [email protected] [email protected] [email protected]

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