Private equity sector back on track

Although the private equity (PE) industry was impacted by higher interest rates throughout the most of 2023, there are signs that deal activity started to pick up towards the end of the year helped by expectations that interest rate hikes have stabilised, according to Federation Asset Management.

In the third quarter of 2023, PE firms announced deals valued at US$101billion with deals of $US100 million increasing by 63% from the first quarter, according to Ernst & Young Global Limited.

Additionally, a recent EY survey of PE investors across geographies also found that two thirds of investors surveyed expected PE activity to accelerate further over the next six months.

“Deal flow through the back half of 2023 has been very strong and we expect this to continue into 2024,” Cameron Brownjohn, Chief Executive Officer of Federation, said.

“We will also continue to focus on our ‘profit with principle’ approach which requires us to make investment decisions from a cautious, long-term viewpoint and an eye on the future.

“Whilst acknowledging the macro environment, we see increasing portfolio relevance for Private Equity through 2024 because of its heightened ability to navigate weaker operating environments for protracted periods,” he added.

The private equity sector in Australia is on track to deliver consistent long term returns which are non-correlated to the listed markets. Over the past decade, private equity and venture capital in Australia have yielded an 18% return on investment compared to 9% for the ASX 100 and 8% for the ASX Small Ordinaries Index in the last decade.

The other attractive asset classes, according to Federation, included childcare sector and sustainable energy infrastructure sectors.

Federation’s childcare portfolio held in 2023 the facilities across New South Wales, Queensland, Victoria and South Australia and has been on target to reach $1 million by 2025, the firm said.

“Our childcare assets are mostly newly built and bespoke centres with long-term leases that have CPI-indexed cashflows and minimal capex requirements. These are very attractive investments for our investors,” Brownjohn said.

In addition to the acquisition of these centres, Federation also focused on installing solar panels to reduce the centres’ carbon footprints.

Brownjohn also pointed out that the provision of childcare has a direct correlated link to improved female workforce labour participation in Australia, another positive ESG outcome.

In the sustainable infrastructure sector, Federation’s 90% owned Riverina battery energy storage system went live. As of early October 2023, the 150MW/300MWh Riverina and Darlington Point Energy Storage Systems (Riverina BESS) was fully operational.

The Federation Alternative Investments II fund also got a tick of approval from rating agency Zenith Investment Partners in 2023, which cited the high calibre and extensive experience of the firm’s principals as reasons for the rating.