Get picky with private equity opportunities

Alternative asset manager, Federation Asset Management, has advised investors to remain prudent and picky with their private equity (PE) investments, predicting a positive deal flow outlook for the rest of 2023.

Cameron Brownjohn, Federation’s chief executive, said opportunities in PE lie around for “astute investors”, as portfolios have had to withstand a plethora of challenges including increasing interest rates, inflation and recessionary fears.

He encouraged investors to remain patient and to adopt a business plan to help in making the decision about where to invest.

“All of our underwriting points to being careful and cautious in an environment of higher interest rates and an uncertain growth profile,” he said.

“Federation is not a high leverage buyout PE player – we have no, or very conservative gearing levels in our portfolio companies, and same for the pipeline deals in diligence. Prudence feels the relevant setting.

“Federation can afford to picky and patient – we have done less than 1% of the opportunities presented which is indicative of the due diligence we apply is assessing opportunities and our patience.

“We are also very clear in terms of the sectors we wish to operate in. The flexibility of private markets allows firms such as Federation to be constructive with portfolio companies to the benefit of investors.”

Brownjohn also highlighted how the manager has learnt its lessons from history, and has proactively sought to bolster the fund and lift returns with inflation-linked revenue contracts.

“Good PE firms in such conditions are patient, conscious of the present but not to the myopic extent that it affects their medium-long term thinking.

“When these firms have invested in similar economic environments in the past, those investments have been amongst the higher performing vintages for those firms. So we are cautiously optimistic about the opportunity set at the moment.”

“Vendors are realistic on price and we can be constructive in the way we both protect capital on entry but also in the ways we seek to maximise returns.

“One area we are examining closely are businesses that seek to solve the asset-rich/cash-poor conundrum of older Australians. Healthcare, a prime area of interest for Federation, is a sector that has largely weathered valuation downturn – indeed many companies in this space have seen multiples expand.”