Private Equity

Once seen as corporate raiders, Private Equity firms are now important contributors to the economy. The challenge for the industry is to work alongside large scale investors such as super and sovereign funds and to focus on strategic growth and intrinsic performance improvement in the businesses acquired.

Private Equity (PE) in Australia now contributes $58 billion annually to the economy. The industry has changed significantly since the GFC with superannuation and sovereign funds providing the majority of the funding. These large scale investors are beginning to exercise their power over fees and alternative investment models. For PE firms, creating value through large scale cost reduction has declined. Investors are putting pressure on firms to operate in a lower fee environment and to make careful choices to invest funds in longer term growth opportunities.

Challenges and trends facing the sector:

• Market volatility will present PE firms with opportunities to acquire companies that are experiencing share price pressure.

• Large number of exit deals over the past 12 to 18 months has led to cashed up PE firms seeking new investments with $6 billion of funds expected to be invested in growth opportunities.

• Less focus on large cost cutting and turnaround and stronger focus on growth through strategic development, fundamental and intrinsic performance improvement and operational excellence.

• Continued pressure to increase transparency and reduce fees, from the traditional “two and 20” formula.

• Changes to the traditional investing model with superannuation funds moving to more co-investing alongside the general partner, which will further reduce fee income to the sector.