Australian private equity firms are dropping fees and having to work harder for funds as volatile equity markets, wary pension funds and offshore assets woo investors, who are increasingly finding themselves in the driver's seat.
The biggest names in private equity gathered on the Gold Coast recently and told attendees that where once investors were throwing money at them, now many funds just would not raise enough cash in Australia and would have to look elsewhere.
"Due diligence is much more detailed," Champ Ventures director Stuart Wardman-Browne told the 18th annual Australian Private Equity & Venture Capital Association Conference last week.
"People have really wanted to understand those issues. People wanted to know if we had learned from mistakes."
Wardman-Browne and other panellists admitted to the crowd that fees were under pressure and some investors wanted to get out of commitments earlier, marking a reversal of fortune for the once mighty sector, whose debt-fuelled tilts at Nine Entertainment and Qantas helped drive equity markets to records.
Among the only funds raising capital are Champ Ventures and Archer Capital, which is raising a $1.2 billion. Champ is raising about $450 million. So far it has secured about $275 million and about 60 per cent of that came from overseas.
"We thought it'd be easier. We had to concede on fees. We've ended up talking through each individual company in significant detail with each individual investor," Wardman-Browne said
The 18 or so premium buyout firms around the world that could sometimes charge fees of up to 30 per cent at the height of the market were under pressure too, Harbourvest Partners managing director Scott Voss said.
What is more, some limited partners in funds are insisting on being able to withdraw money faster.
"That is having a material impact on [internal rates of return]," Voss said, warning that lower fees were here to stay until equity markets and asset prices staged a sustained recovery.
"The market would have to have a pretty significant run. It's much easier to lower fees than to raise them."
Macquarie Funds managing director Michael Lukin warned attendees that only the top quartile of buyout funds would be able to raise new funds, while others would be left with legacy assets bought at the top of the market with the clock ticking on debt.
"It's a race to the bottom," Lukin said, noting that superannuation funds had to watch their costs when their returns could not keep pace with bank deposits.
"People who have come through the cycle, well, you will see them have successful fund raisings. Others will just not get funded at all. It will be binary."
Despite the gloom, Credit Suisse Asia-Pacific managing director of leveraged finance Michael Tierney sounded a note of optimism, saying the debt backing the acquisitions during the boom was much less than many worried: around $24 billion over the next five years rather than the $100 billion contemplated in 2009.
Private equity firms will be able to buy themselves more time to sell off assets.
"That debt wall was sort of like a jumbo jet coming down the runway toward you. Now it looks more like a Cessna," Tierney said.
Even so, that analogy may have been too sanguine for co-panellist Steven Hall, the chief executive of Brookvine. "It's still got a propeller," Hall said.
