Banks at the trough

Pacific Equity Partners' principals shouldn’t be at all surprised when they turn up for work on Friday and find a long queue of investment bankers at their door.

Pacific Equity Partners' principals shouldn’t be at all surprised when they turn up for work on Friday and find a long queue of investment bankers at their door, all brandishing confidential portfolios of their best and brightest ideas.

The $4 billion that PEP has raised for its fourth fund - from a broad pool of institutional investors and high net worth individuals here and overseas - is unambiguously good news for the deal-making community in Australia.

Not only does it treble the size of the next biggest local buyout fund, it makes PEP unique among its Australian peers in being able to contemplate acquisitions of $350 million or more on its own accord.

As PEP managing director Tim Sims points out, the $1 billion available to the next biggest buyout funds really only allows a maximum of $150 million of equity into a particular deal.

A year ago that might have earned the fund leverage of some $500 million. In these straightened climes, it will be lucky to fund a purchase of $350 million, so all other Australian private equity players are restricted to the small and medium end of the market.

Sims says there are "quite a surprising number” of good quality companies in the $400 million to $2 billion range. That’s not to say PEP is rushing in to complete a deal – it has really only struck one of significance in the last few months, the purchase of Hoyts – yet has been looking at something like 100 businesses over the past year.

Sims also insists that debt is just as available as it was this time last year, it’s just that its cost has risen – both in base rates and in margins.

This means that after a particularly exuberant market in early 2008 pushed multiples to record highs, pricing levels have returned to more sensible levels seen several years ago, even if most vendors still have an inflated view of their own worth.

This suggests that some of the more immediate opportunities may come in the listed market, particularly those affected by low liquidity or those who may have fallen out of favour with investors.

And, Sims says, PEP will continue to spread its favours across the investment banking community. "We’re very active with all the obvious investment banks,” he says, noting they are happy to reward those that help them originate a deal. "They are an extremely creative community.”