June 4, 2014
Interviewed by: Ainslie Chandler
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Anacacia’s Opportunistic SME Focus

The retiring baby-boomer generation is leaving plenty of small-to-medium acquisition prospects for private equity firms like Anacacia Capital, says the firm’s founder Jeremy Samuel. In 2013, Anacacia raised a $150-million fund focused on opportunities in the SME space.

The retiring baby-boomer generation is leaving plenty of small-to-medium acquisition prospects for private equity firms like Anacacia Capital, says the firm’s founder Jeremy Samuel. In 2013, Anacacia raised a $150-million fund focused on opportunities in the SME space.

Anacacia’s Opportunistic SME Focus

With Jeremy Samuel of Anacacia Capital

What segment of the market is Anacacia active in?

Jeremy Samuel, Anacacia Capital:

Anacacia is a private equity firm based here in Sydney. We focus on the lower mid-market of small, medium-sized companies. These are typically established, profitable businesses often dealing with succession issues.

Australia’s population is aging. What opportunities is that presenting?

Samuel: We’re an aging population. The birthrate is relatively low. There’s a steady immigration rate and we have a baby-boomer generation coming through where the kids often want to work in different businesses for mom and dad, in entrepreneurial sorts of ventures.  Small businesses are the lifeblood of the Australian economy here and many of them often want to deal with succession issues. They may not want to sell to the competitor down the road. Thus, someone like Anacacia or other private equity firms can step in, help with succession planning, bring in a new management team or use the existing team, do a management buyout, help the founder with succession planning and then, obviously, grow the business at the same time.

You recently raised a fund. What will it focus on?

Samuel: The fund we raised last year was $150 million. It was oversubscribed, focusing exactly as our first fund did on the lower mid-market of established, profitable, small- to medium-sized companies. Many of these businesses are dealing with succession issues like we chatted about before or maybe they’re a non-core divestment of a larger business unit. Early investments are in education, health and food. These are “here today, here tomorrow” industries where we’re trying to back the absolute best quality management teams and help those businesses to grow.

Your first investments in the new fund have been in food, healthcare and education. Why did you choose those sectors?

Samuel: Those three sectors are big parts of the Australian economy. For example, education is about an $8-billion industry. The Australian economies have had now 21 years of consecutive growth. One constraint on further growth is increased productivity from the workforce, so the government and the businesses here are focused on continuing to upscale the workforce. We’ve chosen businesses that are involved in areas where there’s high need for skill. For example, age-care and childcare workers, occupational health and safety, mining services, those types of areas on the education front. Food, again, is a very big part of the Australian economy. Australia has a great reputation for clean, healthy, good food supply and some great branded food companies have come out of here.

Our first fund had great success with Rafferty’s Garden. The second fund we’ve just invested in is called Yumi Quality Foods. Similarly, it’s a great business that picks up on a lot of those things.

The third thing you asked about was healthcare with an aging population. None of us is getting younger and there are needs within the hospital for products and whatnot. We invested in K Care Healthcare Equipment, the largest local supplier of walkers, wheelchairs, trolleys, and other things used in age-care homes and in hospitals. We’ve seen growing demand for that, both domestically in Australia and in the export market, into Asia and the Middle East.

You exited a portfolio company, Rafferty’s Garden, last year. How hard was that? Are exit markets opening up?

Samuel: Rafferty’s Garden is a terrific business; it’s a baby-food business. We were fortunate to exit a couple of businesses last year. By the time we exited, we had 40% market share of the local baby-food market. We sold the business to PZ Cussons, a terrific London stock exchange-listed company. After they announced the exit, their share price went up 10%, so their investors were very happy and we’re very happy. It was a terrific return for our investors and a great result for the management team, the customers, and other stakeholders with the business because what was fundamentally a very strong Australian business is now part of an international group that can hopefully continue that export business and continue to make a terrific, iconic Australian business into a Pan-Asian and global baby-food business.

We find that if you have a good quality management team and a good quality business, exits are relatively easy. Nothing is completely easy, but we had a lot of demand for that business and it was a terrific company right from the time we first invested.

Do you expect Australian exit markets will continue to improve?

Samuel: Australia is a great market to exit for private equity, particularly in the lower mid-market. It may get to be more challenging at the top end because Australia is a relatively small economy, but because it’s such an open economy, it welcomes foreign investors and multinationals. We find that when we’re selling our businesses, there’s always a large set of potential local-trade buyers as well as international-trade buyers. The Australian stock exchange is one of the largest in the world—it punches well above its weight.

If and when the markets are open and that’s an available exit option and the debt markets here are sophisticated, so you often see dividend recaps. From an Anacacia perspective, we haven’t found exits to have been a problem, as you have fundamentally good businesses that are in demand from others. Australia’s a great place to be, from an exit perspective.

What challenges and opportunities do the offshore LPs you deal with see in Australian private equity?

Samuel: Each LP has a different perspective. But what LPs that have been investing in Australia for a long time from Asia, London, and the U.S. see in Australia is an economy that has now had 21 years of consecutive growth. They see its low unemployment, low inflation, a well understood language, a strong rule of law, and a governance system. It has a track record of private equity firms that are consistently, on average, in the top quartile and are outperforming their peers offshore.

That doesn’t mean that will always happen. Clearly, they do their due diligence when they’re looking at recommitting to existing funds or to new funds as well. Australia has just had a very strong track record in private equity and we’re fairly bullish about the long-term outlook continuing that way in private equity here.

Australian superannuation funds have started to pull back on private equity investment. Has that affected Anacacia?

Samuel: We’ve been very fortunate to attract both the domestic and the offshore investors we wanted into the fund. As a small fund, we’ve had the fortunate position that the demand to access our fund has been greater than the supply of capital because we want to stay focused on that smaller end of the market. Though, if you look more broadly, it is true that the superannuation funds in Australia are committing less money to domestic funds now than they were a few years ago. That’s more problematic if you’re in an average performing fund or you’re a very large fund and you want to get the incremental dollar.

We are finding that the super funds that have been committing to private equity for many years are getting more and more sophisticated. If you’re an Australian or a U.S. GP, a European turnaround fund, or a venture firm in China, it doesn’t matter. They’re going to look from a risk/return perspective and from a strategic point of view and ask, “Does this fit well within the portfolio?” which is absolutely what they should be doing. We’re finding that the best-performing Australian GPs are having no problem raising money locally or offshore. For others, it’s a bit more challenging.

How much activity do you expect in the Australian private equity market this year?

Samuel: Forecasting is always challenging. I would not be surprised if we see two or three of the larger funds having a successful fundraise this year. A number of them have come to the end of their investment period and it’s time for them to raise some additional capital. Some of them have good track records to justify that.

On the exit front in the near term, we should continue to see a number of exits. Like the global markets, the Australian markets are quite buoyant at the moment. There’s a lot of activity. We have a lot of caution or concern in the medium term as the year progresses that maybe the markets might run away a bit too far ahead of themselves, both the equity and the debt markets. We’re cautious and concerned about that, so we’re being careful about investments, also on the exit front and the capital structures within the businesses.

Over this year, I suspect we’ll continue to see a steady rate of investments, exits, and fundraising, particularly the top end.

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