As funds managers wait anxiously for super funds to start spending their stockpiles of cash, Ian Macoun is betting that at least some will see opportunities in what might seem an unlikely place – the mid-market private equity sector.
Two private equity veterans have left AMP Capital Investors to open a boutique in Macoun’s Pinnacle Investment Management stable, which will seek $300 million from institutional investors for a mid-market fund, a sector the principals say has a strong appetite for deals that promote succession planning and industry consolidation.
The two managing partners of Pinnacle Private Equity Ltd. are Bill Cook, who prior to five years at AMPCI spent 15 years running investments for Consolidated Press, and Peter Ludemann, a lawyer who advised AMPCI on its private equity investments prior to joining full-time in 2006.
The pair worked on AMPCI mid-market private equity funds BDF II and its successor, PEF III, where their investments included mining services group Runge. After guiding the company through a series of acquisitions that expanded its geographic reach, Runge became the most successful float on the ASX in 2008.
The pair boast that by the end of their time at AMPCI, one-third of PEF III’s assets had been sold – another deal was the trade sale of water services business Total Eden to the listed Alesco Corporation – yet almost 80 per cent of the fund’s capital had already been returned to investors.
“The businesses we work with often have a baby boomer as sole proprietor, the business is well established but the owner might be approaching retirement and looking at succession, wanting to take some money off the table,” Ludemann said.
Pinnacle Private Equity aims to use its network of mid-market proprietors (defined as those whose businesses have an enterprise value up to $200 million) and transactional/business banking experience to identify opportunities for consolidation, perhaps through a roll-up. Cook said that Pinnacle Private Equity, which will always take a board seat on the companies in which it invests, can also introduce a fiscal discipline that’s sometimes lacking at mid-market firms.
The initial fund will have a ten year closed-end structure, with an investment cycle of roughly five years. However Cook said this time frame could be abridged.
“If you can’t do what you want to do at these companies within the first two years after buying them, you’re probably never going to do it, he said.
Mild leverage will continue to be a hallmark of Cook and Ludemann’s style, typically around 3 to 3.5 times EBIT of the target company.
The director of Pinnacle Investment Management, Ian Macoun, said attractive valuations would help make the 2009 mid-market private equity vintage “one of the best ever”.
Macoun pointed to “indigestion” at the large end of the private equity market, where the likes of PEP and CHAMP had raised a lot of money in the good times up to 2007, but were now facing a paucity of deals – yet were too large to make worthwhile deals in the mid-market sector, which he said remained under-competed.
Pinnacle IM will own 30 per cent of the new private equity business, with the investment team holding the balance. Cook and Ludemann plan to recruit more staff once they have raised the $300 million.
Cook said the motivation for leaving AMP was that its mid-market funds were fully invested and now well into their ‘harvesting’ stage. He and Ludemann also wanted to take full advantage of the cyclical sweet spot for valuations in the sector.
The pair came to know Macoun better during the Runge transaction, for which Pinnacle IM’s parent Wilson HTM performed corporate finance work.
Pinnacle Private Equity is the sixth boutique to be backed with capital, marketing and admin support from Pinnacle Investment Management. (The others are Australian equity managers Hyperion, Plato and Solaris; global LPT manager Resolution Capital; and infrastructure shop Palisade.)
As such, the group has hired an additional distribution executive in Andrew Findlay, who spent the previous five and a half years at Macquarie and was head of product for its Professional Series group of external funds managers. Findlay will work with Adrian Whittingham in Sydney and Andrew Chambers in Melbourne.