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Opportunity knocks: Why international investors are answering

SuperReturn Asia speaker, Yasser El-Ansary, Chief Executive of AVCAL shares his thoughts on the growing private equity and venture capital opportunities in Australia.

While the devastation of the global financial crisis is still being felt across many countries, the Australian economy continues to be in a unique position, sharing many of the legal and legislative frameworks of western democracies while sitting on the doorstep to the fast-growing Asia region.

Posting an enviable record of more than 25 years without a recession, Australia’s economic and investment markets have been largely insulated from the uncertainty and volatility that have knocked global markets shares. This has allowed local private equity and venture capital markets to do what they do best – identify opportunities to support the growth of great businesses across all corners of our market.

Australian PE and VC funds attracted A$2.87 billion in new investor funds over the financial year ended June 30, 2016. With an estimated A$7 billion in dry powder next to $3.68 billion already invested, that rivals some of the other major mid-markets across Asia.

The data tells us that it is offshore investors that are increasingly recognising the unique blend of economic stability and growth offered by the Australian PE and VC industry, accounting for more than two-thirds of new inflows in fiscal 2016.

Australia’s A$2.2 trillion pension industry may be one of the most sophisticated in the world, but local pension funds face stringent regulations that implicitly force those funds to maintain a focus on low fees as well as high fund liquidity. Unfortunately this can sometimes come at the expense of investing in asset classes that deliver higher long-term net returns to investors over the long-term.

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Nonetheless, Australia’s mix of economic strength and skilled local PE managers continue to deliver consistent and attractive investment returns.

It has not gone unnoticed, and because of that we expect fundraising and investment levels to remain solid despite bouts of global instability, particularly given the Australian economy’s track record of resilience through a number of challenges.

It’s pivoted through the Asian financial crisis, the bursting of the ‘dot-com’ bubble, the global financial crisis and, more recently, the end of the resources boom, allowing nimble PE managers to find new opportunities.

This last transition remains one of the hidden secrets about the Australian economy: it is far more diverse than resources and commodities alone.

Australia’s services sector is thriving, accounting for approximately 61.1 per cent of gross domestic product, according to 2015-16 government data. It includes financial services, health care and social assistance, international education and tourism. In March 2016, investment in mining fell below services and construction for the first time since December 2011.

Private equity firms are finding opportunities in many of these areas, with the consumer and healthcare sectors accounting for half of the industry’s total new investment last financial year and some of the largest PE deals occurring in the financial services sector. Other sectors with deep opportunities for PE investment include retail, financial services, transport, primary and secondary food production and food technology.

Meanwhile, Australia’s VC industry is once again attracting significant support, especially from institutional investors, after several quiet years over the past decade. Alongside this renewed interest, the Australian government has bolstered its policy support for this area of the economy through the implementation in 2016 of the A$1.1 billion National Innovation and Science Agenda, which marked a major shift towards fostering a more innovative and knowledge-based economy.

Fiscal 2016 represented the Australian VC sector’s second highest total investment (A$347 million) in the last decade thanks to strong local and international support. Information and communications technology (ICT) accounted for almost half of total VC dollars invested last financial year.

Australia is quickly building a thriving fin-tech sector centered around innovation hubs, many of which are supported by major local companies looking to collaborate. The government is also keen to nurture these opportunities, by putting in place a number of specific regulatory changes to facilitate improvements to the ease of doing business for early-stage businesses.

While the US market has been a traditional destination for these fast-growing companies, there is now a real opportunity for VC investors to create a new pathway into the much closer, and faster growing, Asia region.

Greater knowledge about the growing diversity of Australian PE and VC opportunities, coupled with strong understanding of our international appeal, is expected to continue to drive this broad base of support over coming years.

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