With approximately 60 institutional private equity managers managing over $45 billion in funds, the Australian market has matured into a key player in the global PE scene. Venture capital (VC), a closely related field, is also thriving, with around 40 institutional VC firms managing $20 billion, a dramatic increase from just $2-$3 billion a decade ago.
For private equity managers in Australia, raising a fund is just the beginning. Once the capital is raised, the real work begins: sourcing deals, evaluating potential investments, and ultimately selecting the right companies to acquire. But how exactly does the private equity investment process work? And how do PE managers sift through thousands of opportunities to find those that will deliver the best returns?
Understanding the private equity lifecycle is crucial, from the moment a fund is raised to the complex due diligence and selection process that follows, according to the author of the Essentials of Private Equity and founder of Wolseley Private Equity, Mark Richardson.
The Australian Private Equity Landscape: Size and Growth
Australia has approximately 60 institutional private equity managers overseeing $45 billion in funds under management. To put this into context, there are also about 40 venture capital firms in the market, managing $20 billion. This growth in venture capital funds is particularly noteworthy, as it reflects an enormous shift from the relatively small market of just $2-3 billion ten years ago, according to Mr Richardson.
In terms of deal opportunities, Australia’s size and economic profile provide ample investment prospects. The country is home to more than 12,100 companies with annual revenues exceeding $10 million, offering a rich pool of targets for private equity funds. These companies are divided into various revenue bands:
- 8,000 companies with $10-50 million in annual revenue
- 2,000 with revenues between $50 million and $100 million
- 1,500 with over $100 million in revenue
- 600 with more than $250 million in annual revenue
This diversity in company size gives private equity firms a broad range of options, from smaller, mid-market businesses to larger, established corporations. It’s important to note that around 10% of these companies—approximately 1,200—are publicly listed on the Australian Stock Exchange (ASX), presenting opportunities for private equity to execute public-to-private transactions, which have become a common deal type for larger funds.
“Finding the needle in the haystack is a massive challenge, and it requires a huge amount of work within the private equity firm itself, along with a lot of effort from the advisory circuit to bring those company opportunities to the right private equity firm and see if they can secure an investment,” Mr Richardson said.
“That effort really boils down to four key areas of activity, and it takes an enormous amount of time and effort. The deal team within the private equity firm is constantly networking and cold calling. They're always conducting investment research, focusing on industry trends, and reviewing deals that are constantly presented to them by advisors. Particularly in the larger private equity funds, they are always contemplating a public-to-private deal.”
The Investment Process: From Fundraising to Acquisition
Once a private equity fund has successfully raised its capital, the next phase of the process involves deploying that capital into acquisitions. The key challenge is identifying which companies to buy and how to evaluate their potential. This is where the rubber meets the road in private equity.
1. Deal Sourcing: The Numbers Game
Australia offers a significant number of businesses to consider, but even with 12,100 companies meeting the revenue threshold, sourcing the right deal is no easy task. The process begins with an enormous volume of opportunities—often in the hundreds—each year. In fact, PE teams typically review anywhere from 100 to 150 investment opportunities annually, but they only make one to three investments per year. This means that the majority of opportunities reviewed don’t move forward.
A large portion of these opportunities (about two-thirds) comes through advisors—investment bankers, consultants, or brokers who connect sellers with potential investors. The other third, however, are often "exclusive" or "proprietary" deals, where private equity firms develop direct relationships with the target company’s owners or management.
The process of evaluating deals is highly resource-intensive, involving a significant amount of networking, cold-calling, research, and industry trend analysis. Larger private equity funds also contemplate public-to-private transactions, where they acquire publicly listed companies and delist them from the stock exchange.
“The quicker the deal, the greater the risk, unless you've had a relationship with the company for many years prior,” Mr Richardson said.
“The team spends an enormous amount of time networking, cold calling, reviewing advisor-led opportunities, and contemplating public-to-private deals. And the worst thing about all of this is that none of this even touches on value—it’s just getting to the starting point. It costs a lot of time and money to get there, and none of the investors want to see what we call ‘failed deal costs’. So, a lot of time is spent evaluating the company in question.”
2. Due Diligence: Digging Into the Numbers
Once a private equity team has identified a potential target, the due diligence phase begins. This is arguably the most critical part of the investment process, as it ensures that the investment opportunity is sound and capable of generating the desired returns. PE firms generally focus on six key areas of due diligence:
- Market and Competitive Position: What is the company’s position in its market? How does it stack up against competitors?
- Leadership Team: Who is running the company? Are they capable of driving growth and managing risks?
- Financial Performance: How does the company’s financial history look? What are its revenue and profitability trends?
- Risks: What are the risks associated with the business? These could range from operational to regulatory.
- Strategic Fit: How well does the company fit within the PE firm’s broader portfolio or investment strategy?
- Capital and Future Investment Potential: Does the business have the potential to attract additional capital for growth in the future?
One of the most common questions asked early in the process is about the company’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), according to Mr Richardson.
While EBITDA is not a statutory requirement, it is the standard metric used in private equity to gauge a company’s operating performance. Firms typically look for at least three to five years of historical financial statements, including audited financials and projections.
“The biggest advice I can give anyone looking to secure private equity investment is to make sure you have three, four, or five years of historical audited financial information, including EBITDA (earnings before interest, taxes, depreciation, and amortization),” Mr Richardson said.
“It’s worth noting that EBITDA is not a statutory financial metric required by regulatory authorities. It’s not necessarily a true financial number, given the way amortization and depreciation are managed today. However, it is the number the entire private equity industry uses.”
3. Investment Evaluation: The Final Decision
After the due diligence phase, the private equity team assesses the investment’s potential to meet its targets. The key objective is to deliver strong returns, typically aiming for a 30%+ internal rate of return (IRR) and a 3x return on equity within a 3-5 year time horizon. The team evaluates whether the company’s projected financials and growth trajectory are realistic, and if there is a reasonable path to achieving these returns.
Private equity firms also consider the structure of the deal—whether it will be a majority or minority stake—and whether the company will require debt financing in addition to equity capital. With banks less willing to provide leverage due to higher interest rates, private debt providers have become an increasingly important source of capital for deals, Mr Richardson noted.
The deal team’s job is to evaluate how realistic those projections are. The most common adjustments made during this process are in the downward direction—everyone will have their estimates, but the reality often turns out to be lower than originally projected
“The ability to attract future capital is also crucial. Is there scope to generate three times the return on invested equity within the next three to five years? And remember, a private equity deal typically includes both debt and equity. Private equity investors usually provide the equity, while banks provide the debt,” he said.
“However, in today’s market, the biggest growth area in private capital is private debt, given banks' reluctance to offer leverage due to current interest rates and risk conditions.
At the end of the day, the deal team must prove that the investment can deliver a solid return.”
The Realities of Private Equity Investment
Raising a private equity fund and deploying that capital into acquisitions is a highly complex process that requires a deep understanding of the market, rigorous due diligence, and strategic foresight. The Australian private equity landscape continues to grow, with more funds raising larger amounts of capital, but the process of finding, evaluating, and securing the right investment remains an intensive and time-consuming endeavour.
The biggest lesson learned over time in private equity is that the quality of the leadership team—the CEO and their executive team—is crucial to the success of an investment, according to Mr Richardson
A strong, visionary CEO who can hire top talent and execute on strategy significantly increases the likelihood of success.
“A-grade people hire A-grade people which has always stuck in my mind. If you’ve got an outstanding CEO and they’re not afraid to hire outstanding executives, that makes a huge difference to the likelihood of success of any private equity investment,” he said.
The deal flow is abundant, but only a small fraction of opportunities make it through the rigorous evaluation and due diligence processes. Success in private equity is not just about deploying capital; it’s about deploying it wisely—backing companies with strong leadership, clear growth prospects, and the ability to generate solid returns for investors.
As the market evolves, Australian private equity firms will continue to refine their strategies to identify the best opportunities and achieve the returns that make private equity a compelling investment vehicle.
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