Outgoing AVCAL Chairman, Andrew Rothery, set an ongoing challenge to the Australian private equity industry last week - participants need to be better at selling the message that private equity brings significant benefits to the Australian economy and has an important role in economic development.
The good news is that there is a great message to sell.
Studies of both Australian and global private equity investments over time have consistently found that private equity firms create value on a number of fronts. The summary below sets out many of these (which are explored in more detail in AVCAL’s submission to the Board of Taxation Discussion Paper on CIV Tax Arrangements - Appendix A: Private Equity in Australia). In short, Australian private equity:
- channels foreign investment into Australia - With a relatively small population (by world standards) Australia has historically benefited, and continues to benefit, from foreign investment as a source of capital. Private equity channels medium to long term foreign investment into Australian businesses which would otherwise be starved of capital. By employing such additional capital, portfolio companies are able to drive growth in core businesses;
- is a source of patient capital for businesses - In a climate where financial institutions have cut back on lending, private equity continues to be a patient source of capital. In fiscal years 2008 to 2010 when credit growth slowed significantly and domestic fundraising remained difficult, private equity invested an average of $2.2bn in Australian businesses;
- plays a valuable role in succession planning in small-to-medium sized family businesses - Private equity assists SME owners exit businesses they have spent a lifetime growing at a stage where they are still profitable, rather than risk the ongoing future of the business (or closing them down). As Australia comes to terms with its ageing population (and the fact that post war baby boomers are starting to retire) succession planning is becoming an increasingly important issue;
- promotes management performance and productivity - Studies of Australian private equity investments demonstrate that the greatest generator of growth in the value of these businesses has been proactively growing the core business (more so than through financial engineering, leverage or cost reductions). By investing in strong management teams, improving organisational structures, and implementing strategic initiatives, private equity is able to drive improvements in operational performance and total factor productivity;
- supports private sector employment - Studies of private equity investments indicate a strong positive relationship between private equity ownership and long-term employment growth. The labour productivity rate of private equity backed firms is almost double that of the comparable national figure. In addition, private equity backed firms invest in additional employees at a significantly faster rate than comparable companies. By investing in productivity and innovation, private equity is a net generator of jobs in Australia.
- generates growth in key sectors of the economy - At the end of 2010, the Australian private equity industry had an estimated A$25bn in funds under management with investments in 365 companies in a broad range of sectors. In fiscal years 2009 and 2010, private equity investment in small and medium sized enterprises valued under $50m made up to 85% of all private equity investments (even though they only accounted for 17% by value of all transactions).