106362 AVCAL Deal Metrics Survey_0

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Deal Metrics SurveyA survey of Australian VC and

PE deal activity in FY2011

December 2011

In association with


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Welcome to the 2011 AVCAL and Pacic Strategy Partners Deal Metrics Survey: the third annual

report o private equity (PE) and venture capital (VC) deal activity, covering deals executed up tothe end o June 2011.

These deal metrics are important or the eective tracking o how PE and VC deals and valuations

are trending over the short, medium and long term.

Since the last report, PE activity has shown some promising signs in spite o continuing economicuncertainty. This has been demonstrated through a signicant increase in deal value comparedto the prior two years, thanks to the gradual return o larger deals and continued resilience in the

mid-market segment.

However, there have been continued challenges in the VC space. This is refected in lower VC dealvolumes and sizes, with older unds reaching the end o their lives and ewer and smaller new undsbeing established.

We would like to thank Pacic Strategy Partners or their valuable input into the production othis report.

Katherine WoodthorpeChie Executive, AVCALDecember 2011

Message rom the Chie Executive


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With the launch o the third annual report o PE and VC deal activity, we have extended the

coverage and depth o the deal database, which now covers transactions between FY06-FY11 across116 PE unds and 58 VC unds. The database represents total PE investment o $70.8b across 694transactions, and total VC investment o $980m over 731 investment rounds. We also interviewed40 PE and VC unds, equity and debt providers and advisors to get their perspectives on dealactivity and market outlook.

In the Australian PE market, there has been signicant activity ater two years o decline throughthe global nancial crisis (GFC). The market has seen a return o transactions completed atattractive prices or quality businesses with robust underlying economics, solid earnings qualityand strong growth prospects. Appetite or businesses alling outside this realm has attracted less

attention, except or some opportunistic activity on turnaround and distressed businesses.

Valuation multiples have increased in line with the level o asset quality. This also refects thecontinuing convergence o price expectations between buyers and sellers. However, many potentialvendors are also reported to have remained on the sidelines, either waiting or better economic

conditions or looking to rm up their businesses perormance beore selling.

Access to debt remains dicult, however, debt unding markets have nevertheless improvedcompared to conditions observed during the GFC. Exit activity has surpassed expectations, with anumber o exits generating attractive returns during the last nancial year. While the IPO market

remains virtually closed, secondary deals (sponsor-to-sponsor) have become an increasinglypopular exit route. Furthermore, trade sales have also picked up in activity, largely driven byincreasing interest rom overseas.

The VC landscape has remained challenging, with ewer unds investing and consequently loweroverall levels o investment. Government support in the orm o the Innovation Investment Fundprogramme has been positive, although urther policy support will be needed to stimulate greaterprivate investment in the commercialisation o Australian innovation.

In summary, the market has demonstrated positive signs o renewed activity characterised bygood deals done at good prices and once global economic uncertainty recedes, deal activity isanticipated to urther improve.

For urther inormation, please contact:

Pacic Strategy PartnersChris PaxtonDirector

Tel: +61 2 9253 4950Email: [email protected]

AVCALKar Mei TangResearch Manager

Tel: +61 2 8243 7010Email: [email protected]

Executive Summary

1. Database does not include refnancing transactions or cash injections and t reats co-investments as a single transaction.
mailto:chris.paxton%40pacificstrategy.com.au?subject=mailto:karmei.tang%40avcal.com.au?subject=mailto:karmei.tang%40avcal.com.au?subject=mailto:chris.paxton%40pacificstrategy.com.au?subject=


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A ocus on quality

FY11 marked a turning point or the Australian PE market compared to the preceding two years.

The total enterprise value (EV) o transactions increased signicantly rom $3.9b in FY10 to $10.2bin FY11. There were ewer transactions both new deals and bolt-ons in FY11 compared to theprevious year. However, new deals accounted or a slightly larger proportion o all transactions overthe year (49% in FY11 compared to 46% in FY10).

Private Equity

Figure 2: Number of transactions, FY06-FY11Figure 1: Enterprise value of transactions,FY06-FY11 (A$b)

The increase in the value o deal activity refected both improved condence among the investmentcommunity and debt providers, and the availability o high quality businesses. Many o the unds

surveyed commented on the improved quality o deal fow in FY11 and improved conditions orcompleting deals. Consequently, buyers generally avoided assets which were perceived as riskierinvestments and which did not present the same quality oten those which were operating inmarkets with less attractive macro trends, or with higher volatility in their earnings.


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5.0 4.76.1

11.412.0

10.2

Ave: 11.5

25.4 25.9

24.9

25.3

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3.1 3.3 3.95.2

6.77.5

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107

285

184

78

60

234

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FY06 FY07 FY08 FY09 FY10 FY11 FY06 FY07 FY08 FY09 FY10 FY11

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44

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1925

49

FY06

FY07

FY08

FY09

FY10

FY11

EV < 50m EV 50 - 250m EV > 250m

57%

215

%Total deals

0

25

50

66

4136

1719

13 13 13

9 10

41

66

2827

2523

26

32%

119

11%

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Figure 3: Moving Annual Total (MAT) of enterprise value of PE transactions, FY06 - FY11 (A$b)

Total deal value increased signicantly in FY11, boosted by a couple o large transactions byinternational PE unds. Looking at deal value on a quarterly moving annual total (MAT) basisconrms the upward trend in activity over the last two years, and demonstrates that the industry

has emerged rom the lowest point o the cycle.

As a result o the shit in the mix o deal activity towards larger transactions, the average valueor new deals increased rom a low o $60m in FY10 to $234m in FY11, signicantly higher thanaverage value in the last three years. The average value o bolt-ons also experienced a notable lit,continuing the strong upward growth trajectory over the last our years.

Figure 4: Average enterprise value of new PEtransactions, FY06-FY11 (A$m)

Figure 5: Average enterprise value of bolt-ontransactions, FY06-FY11 (A$m)

Facilitated by converging price expectations and increased debt availability, there was a signicantincrease in the volume o large deals (above $250m in EV) in FY11. The number o medium-sizeddeals ($50-250m EV) remained consistent with the previous year, while deals under $50m wereslightly lower.

Figure 6: Number of PE transactions by EV band


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Pricing & debt levels refect ocus on quality

Price multiples (EV/EBITDA) increased in FY11, in spite o continued economic uncertainty. Theincrease was driven by a number o actors: the quality o assets acquired, continued convergencein vendor and purchaser pricing expectations, and a change in deal size mix (or more precisely, askew towards larger deals and ewer bolt-ons which have traditionally been transacted

at lower multiples).

Figure 7: Average EV/EBITDA and Debt/EBITDA multiples

Note: Weighted by transaction enterprise value


Figure 8: Average equity contribution (% of total EV)


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FY06 FY07 FY08 FY09 FY10 FY11 FY06 FY07 FY08 FY09 FY10 FY11

Media and Communications

Retail

Business and Industrial Services

Energy and Environment

Business and Industrial Products

Healthcare and Life Sciences

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Figure 9: PE transaction value by industry sector, FY06 - FY11 (A$b)

On the debt unding side, although most unds experienced improved access to debt, PE sponsorsmaintained relatively stable debt multiples at 3-4 times (3.8x in FY11) and equity contributionsremained relatively high (52% in FY11).

Senior debt remained the primary source o debt unding, with PE rms preerring to deploymore equity rather than high-cost subordinated debt which was virtually non-existent intransactions in FY11.

Exit activity resilient

There were many successul exits over the last nancial year with attractive returns that wereabove expectations, particularly given the uncertain economic environment. Secondary transactions(sponsor-to-sponsor) gained popularity as a means o exit in FY11, uelled in part by the lacklustreIPO market or non-resources stocks. Trade sales also continued to eature as a key route to exit,including increased activity rom international trade buyers.

Focus on sectors with strong undamentals

The Healthcare, Energy and Consumer Goods sectors saw an increase in investment relative toprior years, as investors backed transactions exposed to the strong underlying macro trends inthese sectors.


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Hospitality and Consumer Services Consumer Goods

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In FY11, EV/EBITDA and Debt/EBITDA multiples or Healthcare & Lie Sciences, Consumer

Goods, and Hospitality & Consumer Services remained relatively consistent with previous years.Across most other sectors, EV/EBITDA multiples, and to a greater extent Debt/EBITDA multiples,have generally declined.

Figure 10: Average EV/EBITDA by industry new deals

Figure 11: Average Debt/EBITDA by industry new deals




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FY11FY10FY09FY08FY07FY06

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Subsequent rounds

New investment

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66 69 72 98 93 72Number ofcompanies invested in

FY11FY10FY09FY08FY07FY06

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New investment

FY06

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87 9383

110 105

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Lower level o venture investment

The VC environment remained challenging in Australia, as refected in a decline in both investment

value and volume. The value o VC investment in FY11 at $119m was the lowest recorded over thelast ve years. Similarly, the number o new investments ell to 35, also the lowest recorded.

Venture Capital

Figure 13: Number of VC Investments,FY06-FY11

Figure 12: Value of VC investments,FY06-FY11 (A$m)

Looking at VC investment value on a quarterly MAT basis clearly shows the continued decrease innew investments over the last nine quarters.

Figure 14: Moving Annual Total (MAT) of VC investments, FY06-FY11 (A$m)


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The average size o new and subsequent round VC investments remained relatively unchanged romthe previous year at $1m and $1.3m respectively.

While activity was lower across all industries, Healthcare & Lie Sciences, and Computer &Consumer Electronics continued to lead the top VC investment sectors in FY11. From a longerterm perspective, these two sectors accounted or 49% and 23% respectively o the total value o VCinvestments rom FY06 to FY11.

Figure 15: Average VC new investment size,FY06-FY11 (A$m)

Figure 16: Average VC subsequent round investmentsize, FY06-FY11 (A$m)

Figure 17: VC investment by industry, FY06-FY11 (A$m)


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Healthcare & Life Sciences

Media & Communications

Computer & Consumer Electronics

Business & Industrial Products

Energy & Environment

Construction Business and Industrial Services

Retail

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Figure 18: VC investment by industry and year, FY06-FY11 (A$m)


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Australian PE activity has seen a return to growth, and barring any signicant nancial shocks,

many market participants expect there will be continued growth in PE activity. The next couple oyears may present some excellent opportunities or investing in Australia, and could prove to be agreat investment vintage.

Investment activity is expected to pick up as the economic outlook improves and uncertaintyreduces. Consequently, deals or quality assets should continue to be done at attractive prices. Whilethere has been some rationalisation o PE unds, and there may be more to come, there is a strongbase o local and international PE unds operating in Australia with access to substantial dry powderthat are delivering strong returns.

A number o risks remain, including the potential or urther credit tightening as Europeansovereign debt issues unold and the potential or a second wave o the GFC. These risks, combinedwith continued uncertainty over Government policy initiatives across a range o industry sectors,have made investors cautious and may constrain undraising activity.

Partly as a result o these risks, the ocus o deal making has reverted to industries and companieswith strong undamentals and traditional approaches to value creation, with PE unds workingclosely with management teams to drive protability and growth within the business. In line withthis, the ocus on due diligence prior to investment has continued to increase.

From a sectoral perspective, businesses linked to resources and healthcare are likely to be strongtarget areas or growth. Sectors which have underperormed over the last ew years (e.g. retail) mayalso present new opportunities or investment as these sectors bottom out and revert to growth.

In the VC sector, the environment remains challenging. While Government initiatives such as theInnovation Investment Fund have been welcomed, urther industry rationalisation is expectedunless new or existing VCs can raise substantial new unds within the next ew years to replace manyo the current unds which are reaching end-o-lie, and invest in the many attractive opportunitiesavailable in Australian early-stage enterprises.

Nevertheless, it is expected that the PE markets renewed activity, with deals currently at attractivevaluations, should continue to set the tone or the months ahead.

Outlook

Promising signs but risks remain


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1 Macquarie Place

Sydney NSW 2000

Tel + 61 2 8243 7000

[email protected]

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106362 AVCAL Deal Metrics Survey_0