Private equiteers still on the hunt

Friday, 14 December 2007

The AIDC Boardroom Report., Vol5., issue 23., Dec 18th 2007

Private equity managers are still on the hunt for deals in Australia despite the global credit crunch, but the size of their prey may be on the decline, says Justin O'Brien, an Australian National University (ANU) professor who directs the corporate governance and regulation stream of GOVNET.

“In the main, private equity still has a big presence in Australia. The big players are not pulling back and there is money around looking for acquisitions at this very minute. Private equity funds are cashed up and here to stay and Australia remains an attractive place for them to operate in,” he says.

“But the era of the mega deal – such as the proposed Qantas deal – may be over. We will see smaller scale acquisitions targeting mid-sized and smaller companies. Private equity will incrementally build up its space in the market, but without the big leverage buy-outs of the past.”

O'Brien adds that the easy credit environment that private equity firms enjoyed in the past was just “the cherry on top of the cream on top of the cake”. “It just made it easier for private equity

firms to prosper. Private equity firms would say that they used irrational debt markets to their advantage. But there's nothing wrong with their business model. Their covenant-like lending

can withstand problems in the debt market. They often only have to pay back their debt in say, six years.”

Commenting on private equity's corporate governance model, he says: “Private equity deals with the perennial problem of separating owners from control of a business. It aligns the interests of managers and owners because the managers are the owners of the business. “But private equity also raises other issues – for example, what role do independent directors play? In addition, private equity firms don't have the same disclosure requirements as public companies. Private equity firms don't have to report in the same way. We are in a situation where we don't know what's going on in that black box. Have private equity firms figured out better ways to run corporations or better ways to manipulate financial markets? We haven't figured this out yet. We have to take a lot of what we see at face value.”

O'Brien's comments follow a roundtable discussion on financial markets held at ANU in Canberra last week which coincided with the launch of his publication, Private Equity, Corporate Governance and the Dynamics of Capital Market Regulation.