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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