2020 M&A Forecast - Private equity: More cautious in 2020?

2019 was a busy year for domestic private equity
(PE). Several existing managers — including
Pencarrow and Waterman — as well as some
new entrants such as NZ Equity Partners, raised
new funds. There was a similar story in Australia,
with a number of high-profile managers also
conducting significant raises.

Several new investments were made by domestic
and overseas funds. We were involved in Brookfield’s
acquisition of Vodafone, the sale of Cin7 to Rubicon, the
sale of the Habit Group by NZEP to Livingbridge, Adamantem
backed Servian’s acquisition of Enterprise IT, Pencarrow’s
bolt-on of Aegis to MMC and Next Capital’s acquision of NZ
Bus.

With so much money available for investment, there
will continue to be pressure to spend it. However, as we
predicted at the start of 2019, a higher level of caution is
emerging as tales of buyer remorse increase and business
confidence deteriorates.

Patience is required

Deal processes are now taking longer. In some cases,
transactions have been abandoned entirely as managers
complain of sellers with unrealistic price expectations and
seemingly over-optimistic views on what the future holds.
We expect that trend to continue into 2020, with domestic
private equity funds, in particular, treading carefully.

The nature of deals may change

We think deals will still get done, but the nature of those
deals may change. Funds will still invest in high quality
assets with good track records and solid and realistic
plans for the medium to long term, but they will do this
with cautious optimism.

We may see a trend towards funds taking an initial
minority stake in targets, with a clear pathway to
acquiring a larger portion of the pie later on. They
may also spend longer engaging with targets before
committing, to see how things pan out.

Processes will take longer, involve more due diligence,
and incorporate more downside protection.

Exclusivity the norm?

Exclusivity is likely to be a regular requirement for sellers
looking to motivate managers to participate. Funds
may not be so willing to engage in highly contested bid
processes.

At the same time, we may see money directed towards
smaller, bolt-on acquisitions, where value to existing
portfolio companies can be added, as smaller companies
face uncertain times and their pricing cools ahead of
larger targets.

Divestment on the horizon?

The other main theme for private equity is likely to be
one of divestment. Our research tells us that there are
56 New Zealand businesses that have been held by private
equity investors for three years or more. Given typical
private equity investment cycles, that must mean a lot of
businesses will be coming to market from 2020 onwards.

But who is going to buy these assets?

Capital markets are unlikely to provide the answer for
many (if any) of these businesses. Indeed, if anything,
there may be more take-private transactions in 2020.

Large corporates with healthy balance sheets may be
part of this story. However, we also think that there will
be a trend towards PE-to-PE secondary transactions, as
assets trade up from domestic and/or Australian mid-cap
funds into larger, international funds who continue to see
New Zealand as an attractive, fair and safe place to park
money amidst global uncertainty.

If that is to be the best pathway to exit, the promised
review of the scope of the Overseas Investment Office
(OIO) regime, in particular around timing, may become
even more important.

Read the Full Merger and Acquisition Forecast

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