Private equity defies the downturn and rebounds to levels not seen since the financial crisis

Private equity investments in Australia have bounced back to levels not seen since before the global economic crisis, according to research from McKinsey.

The consultancy firm found the volume of private equity deals in Australia and New Zealand rose by 28% last year.

However, while deal activity increased, the average value of transactions fell by 18% to $140 million from $170 million in 2010.

One of the most striking changes in 2011 identified was the proliferation of smaller transactions with the number of Asian deals valued at less than $100 million doubling.

The larger deals – those valued at more than $500 million – that garner the most attention, demonstrated much less impressive growth, rising from 16 deals in 2010, to just 24 in 2011, well below the 37 large deals recorded in 2007.

“With China’s growth beginning to slacken, international players turned some of their attention to Australia, home to two of the top 10 deals recorded in Asia-Pacific. Yet the market’s recovery is still in its early stages,” McKinsey said in its report, Private Equity Asia-Pacific: Is the Boom Back?

The report says that while private equity activity in the US and Europe remained in a lull as debt worries and weak employment data continued to dent confidence in those regions, investments in the Asia-Pacific region surged to $65 billion last year, a level not reached since the global financial crisis struck in 2008.

Bruno Roy, partner with McKinsey’s  principal investors practice in Asia and co-author of the report said Asia was one of the few bright spots in the global private equity market.

“There’s little risk that the market will soon become saturated: as a percentage of gross domestic product, private equity penetration rates remain low compared with more established markets like the US and the UK,” he said.

“Successfully tapping into the opportunities in Asia will require a granular understanding of the differences across markets.”

The McKinsey research is supported by the latest Cambridge Associates LLC Australia Private Equity and Venture Capital Index, which shows a rise in private equity returns of 7.85% in 2011, significantly outperforming the S&P/ASX 300 Accumulation Index.

As of December 31, 2011, the private equity index had annualised returns of 7.85%, 7.11%, 3.29% and 7.52% over one, three, five and ten years respectively.

Australian Private Equity & Venture Capital Association chief executive Dr Katherine Woodthorpe told SmartCompany private equity had seen increased activity in acquisitions and exits, which was a healthy sign for the industry. 

“Bounce back is a strong word but we are certainly seeing increased activity,” she says.

“Like all hiatus, you get pent-up demand, so there is demand for companies to go and invest and they also have a significant number of exits with some waiting to exit for some time.

“So when the markets indicate that there is an opportunity to sell then people are selling, so it has been a good period for private equity activity.”

However, Woodthorpe says despite strong activity in Australia, private equity activity here is still influenced by the worldwide economy.

“Private equity, like every other part of the economy, is affected by the overall economy, so I am always cautious about global headwinds to be so bold in my assertions,” she says.