Blackstone is working on three or four private equity deals locally after missing out on Healthscope, and this process is showing James a lack of depth in the bank debt markets for private equity.  “For large deals, you need to have foreign banks participate, and that’s got its complications,” he says. “The debt markets here aren’t as deep in relation to the size of the stockmarket … or the deals volume as with some markets.”  At the other end of the private equity spectrum, the $126 million ING PEAL is licking its wounds after some bruising years. In the financial year 2009-10 it managed a modest after-tax profit of $5.1 million compared with the previous year’s loss of $10.9 million. ING PEAL is a mainly fund-of-fund product in Australian and New Zealand private equity managers, venture capital, growth capital and buyouts, and it was ING’s “attempt to provide institutional-grade private equity to smaller investors”, says Schahinger. “It was put together as an evergreen,” he says, “but in the past few years, the listed market has not embraced any of the alternative investment-style vehicles.”

The fund is now being wound-up for specific reasons, Schahinger says, which are related to its specific structure rather than the sector. “Historically, the major support for private equity has come from institutions, rather than listed vehicles backed by retail-style investors. So, it was a good idea which hasn’t attracted support unfortunately.” ING PEAL floated in November 2004 but there was always a gap between its net asset value and share price. Schahinger says the fund’s strategy changed 18 months ago because “there’s good value in our portfolio [but] how do we get it out to our shareholders if it’s not reflected in our share price?” “So, we’re going to be winding down our portfolios and returning all the proceeds to investors over time, with an indicative timeframe of four years.” What prompted the change? Schahinger says it was due to “what we perceived as the market’s rejection of these vehicles in Australia”.

“The recognition that it was a size that would be difficult to grow because we would continue to have a disconnect between what we believed was the true value and the share price, so if we needed to raise further capital it was always going to be fairly dilutionary. The GFC put more pressure on the company.” However, in the bullish corner, Barwon’s Armstrong says a minimum $200 million is needed for any substantial private equity war chest – which is what Barwon has for its secondaries and global listed private equity vehicles, which are “both ways to invest on fee-efficient terms”, he says. While Armstrong is buoyant about the private equity market, he is losing sleep about “a really concerning trend – that instos are giving every indication they’re going to commit more money to fewer managers and that’s not a positive thing. So, the chosen few get to scale-up and get bigger, and do bigger deals.