Finding quality deals at good prices is becoming increasingly harder on the back of an improving fundraising climate and the easing of the debt finance market, according to Russell Moore, Partner, Advisory Services, at Grant Thornton New Zealand Ltd.
Commenting on the fourth edition of the Grant Thornton Private Equity Report, an annual survey of 175 senior industry practitioners from around the globe, he said the findings of the report are being mirrored here in New Zealand.
“We have seen strong investment flows coming into New Zealand over the last couple of years, backed by an increase in investment into (or in conjunction with) New Zealand private equity (PE) funds from the New Zealand Superannuation Fund and ACC. This level of investment has started to put pressure on valuation multiples.
"More competition means one thing - higher prices. Higher prices at entry make it harder to achieve attractive returns at exit. This is driving a clear focus on the question around how sufficient value will be generated to justify the costs and returns associated with private equity capital," he said. While transactions with higher premiums are occurring and are expected to continue, PE firms are incorporating increasingly more synergic value in their valuations to make the deal work. This highlights increasing execution and performance improvement risks post acquisition and emphasises the requirement of skilled management.
The Grant Thornton survey pointed to entry multiples continuing to increase over the coming year.
The majority of respondents from the survey regard themselves as ‘growth investors’, as opposed to ‘value investors’, further demonstrating an acceptance of the need for a transformational approach to portfolio management in order to build the desired returns in today’s market.
Russell Moore says that while finding value remains important, it is more about having a strategy for generating performance improvement after the deal.
Over three quarters of respondents believe that buying a good company in an average market is better than buying an average company in a good market. They believe that of what defines a good company, and indeed a key reason to pay a premium, comes down to the strength of the management team.
“In the current environment especially, being able to accurately assess management’s ability to implement the post-acquisition plan is a vital part of investment decision making. Despite this, management issues are the single largest reason for a deal to collapse at the due diligence stage, suggesting the need to assess and address management quality as early as possible within the deal cycle.
“As part of the origination process, investors are often able to form a good view of the capability of a narrow selection of the senior management team. A far broader and deeper perspective is needed of the entire management team's ability to deliver a new business plan. More emphasis on developing this understanding, ahead of detailed diligence processes, is a valuable step in mitigating deal execution risk,” Moore said.