June 4, 2014
Interviewed by: Ainslie Chandler
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The Succession Planning Opportunity

There are more than 10,000 companies in Australia’s lower-to-mid enterprise market and two-thirds of them are owned by the soon-to-retire baby boomer generation, Wolseley Private Equity’s Andrew Petering told Privcap. This is set to present investment prospects for private equity, as they battle with inevitable succession planning issues.

There are more than 10,000 companies in Australia’s lower-to-mid enterprise market and two-thirds of them are owned by the soon-to-retire baby boomer generation, Wolseley Private Equity’s Andrew Petering told Privcap. This is set to present investment prospects for private equity, as they battle with inevitable succession planning issues.

The Succession Planning Opportunity

With Andrew Petering of Wolseley Private Equity

Which part of the private equity market is Wolseley active in?

Andrew Petering, Wolseley: 

We’re an owner-managed firm, clearly focused on the lower end of the mid-market in Australia and New Zealand. We’d define that space as about $30 to $120 million of enterprise value. Wolseley is distinguished by a hands-on approach to its investments and is very clearly a controlling-interest investor.

Wolseley has been raising its third fund. How strong has the interest been, from offshore and local investors?  

Petering: We’ve had good appetite. It’s nice to have over 40 investors active in the data room at this point, early in our process. That’s good. That’s been driven by a good response to some good metrics we’ve put on the board through our first two funds. Most of the international investors were clear with us that they wanted to see track record of a couple of funds. So, we’ve delivered now on five realized investments, more than two times the money back, and north of 36% IRRs. Fund Two, our 2008 vintage fund, is on track for north of two times and 30% IRRs. That’s played out well for us in the timing of encouraging investors into Fund Three. I suspect we’ll continue on a trend of an increasing proportion of international money. Fund One, which we raised in 2005, was 100% domestic. Fund Two was about 25% offshore money. It’ll be about 50% from offshore in Fund Three but with strong re-up from our domestic investors.

Are there any broad themes regarding Australian private equity that emerge from talks with offshore investors?

Petering: We’ve seen some common themes come through. Access into Asian growth is a common theme; most investors we’ve spoken to have been targeting that around a developed Asian theme, which seems to be a bucket of Korea, Singapore and Australia. That’s a strong common theme coming through. There’s been some recognition that China and India, whilst very interesting markets, are challenged in terms of returning capital. So, that access into Australia as part of that developed Asian bracket is a strong driver. Within the Australian focus, we’re also seeing strong interest around the mid-market sector. That’s being driven by deal flow and pricing, very common things coming through in discussions with investors. Our research has indicated more than 10,000 companies in that lower-mid bracket space, just in Australia alone. And we estimate more than two-thirds of those are owned by baby boomers. So, by the time you see succession play through that over the next five to 10 years, an enormous wave of transition of ownership will occur. We have been seeing that as a strong theme in our deal-flow pipeline already.

What is the opportunity presented by the retirement of the baby boomer generation?

Petering: They are typified by people in their late 60s and 70s who have built very successful and robust businesses with good brands, but typically have started to become more risk adverse at a later point in their life. Now, it’s much more about protecting a nest egg than driving strong growth in those businesses. So, we’re seeing a real opportunity to reinvigorate the management, allow fresh capital in there and a better risk appetite to acquire or organically grow those businesses and we’re seeing very good results out of that. We’ve deliberately targeted what we’ve termed our “bankable CEO” program as a deliberate strategy into providing succession solutions for those businesses.

What is your bankable CEO strategy?

Petering: The tag line for Wolseley’s business is it’s all about the people. And that’s the most fundamental piece we have to get right in any investment thesis—the management team we’re backing. We’ve taken that to its ultimate conclusion in a number of circumstances partnering with the management team before we find the company. We’ll go out and proactively search together for a great business that we think has an opportunity to be unlocked with new management and capital. So, we’ll work in a partnership with those bankable CEOs, who are typically people with 20+ years of industry experience in a sector. Those connections are invaluable for us in unlocking opportunities that we may not see otherwise. We’ve seen a few benefits come out of that. The banks certainly are attracted to backing a track record of successful growth and leadership, hence the term “bankable CEO.” We find there’s a much better alignment as we go into those projects because we’ve been working with the leader of the business on developing the strategy and investment thesis for quite a period before we get into the investment. Also, we’re starting to see outperformance on the returns of those. So, as we start to realize those investments, it’s proving successful in driving better returns.

A good example of that is Nexus Day Hospitals. Jeff Thompson is an executive who has had more than 20 years’ experience both in private equity and the healthcare sector, most recently running a publicly listed company. We’ve partnered with Jeff on an analysis around the healthcare sector in Australia and opportunities. The important part for Wolseley in looking at those opportunities is trying to find niches where a fund of our scale can be a player at a number-one or number-two level in a sector. That’s critical. We have no interest in being a number six or seven in a market. So, we did a top-down analysis of the healthcare sector in Australia with Jeff. Day Hospitals was a real opportunity we isolated out of that. But where that rubber has hit the road around the relationship with Jeff is access into discussions with doctor/owners of those day hospitals. Jeff’s networking to that environment in the healthcare sector has been very valuable. From a standing start in a concept three to six months ago, we’ve now got three hospitals associated into Nexus and several more in that pipeline. I put that down to some intellectual property we’ve been able to deliver into the ownership structure and alignment with doctors, but also into Jeff’s network and relationships into that healthcare sector.

Is that the only way you source your deals?

Petering: If you look at our portfolio of 13 investments to date, seven are led by bankable CEOs. It’s certainly a very important part, a key driver of proprietary deal flow. But we’re also seeing very good opportunities around partnering with existing owners and providing capital into businesses to back the incumbent management team. Both of those are channels for deal flow for us.

Aside from healthcare, which parts of the Australian economy do you think are ripe for private equity investment?

Petering: If we take a broad view, there are a lot of opportunities coming out of that succession of baby boomers. But if we look at areas we’re specifically focused on at the moment, there will be common themes across a number of investors where we’re spending a lot of time around healthcare and aged care. The demographics promoting that industry are very stark and interesting to us. IT and education are sectors that we’re also spending a lot of time researching and doing work around. But we also see good opportunities for investments still around engineering services, environmental services, and even manufacturing, but with a caveat that we’re looking for real IP in those businesses that can support new and export opportunities.

What level of activity do you expect in the Australian private equity market this year?

Petering: We’re seeing a steady flow of fundraising. A number of funds will come to market over the next two or three years. And that’s just a steady evolution of revolving funds. We’ve seen quite an attrition of fund managers over the last five to 10 years as there’s been a trend away from broad-brush manager portfolios into what I describe as more a flat quality and limited partners looking for access into top-quartile performance. But that has a little way to wash through in the industry. In terms of deal flow, we’re seeing that well supported by general transition of business ownership, so that will continue very strongly. And exits have seen a good pickup in M&A over the last six months or so, generated by a trend of boards getting extra confidence on the outlook and stability. Change in government and economic outlook have all assisted with that. But also, there’s been a reconciling of vendor expectations and buyer expectations around valuations, which has led to a bit more activity on that front.

As you get into a stable regulatory environment with new government and a stable economic outlook that people can get a reasonable consistency of view about, it helps with deals starting to come through. Corporate boards are also starting to recognize that with a reasonably stable, organic growth outlook, they also may have to look to acquisitions to drive outperformance on growth targets. That’s driving a bit of the corporate activity as well.

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