The past few years has seen record-breaking levels of deal activity as well as historically high levels of dry powder for Australian-focused PE funds. As at June 2023, there was USD 14.8bn of dry powder in the Australian market. However, deal flow faded towards the end of FY22 and remained subdued throughout FY23 as investors, fundraisers, buyers, and sellers alike, faced persistent inflationary pressures, interest rate hikes, and continued geopolitical tensions.
In this article, our experts explore the trends that will shape the Australian private equity (PE) landscape over FY24.
BDO's PE predictions for FY24
- Australia’s PE market will continue to be an attractive region for foreign investment, despite global macroeconomic headwinds
- ESG risk will heavily impact the likelihood of successful deal completion
- Global mega-trends of digitisation and sustainability will drive M&A activity
1. Australia’s PE market will continue to be an attractive region for foreign investment, given global macroeconomic headwinds.
Australia is well-positioned to continue growing its status as a highly attractive market on the global stage. It offers a combination of favourable conditions: a stable political and economic environment, robust regulatory frameworks, a highly skilled workforce, and a variety of investment opportunities across key industries such as finance, technology, healthcare, mining and energy. Australia is also the gateway to Asia-Pacific, one of the fastest-growing regions in the world.
Since FY19, Australian PE deals have shifted towards higher levels of inbound activity. Preqin data indicates circa 58 per cent of Australian PE deals across FY22 and FY23 involved foreign PE acquirers/investors, up from circa 48 per cent during FY19 to FY21.
Coupled with historically high levels of dry powder, Australia’s PE market will continue its strong growth, despite global macroeconomic headwinds in the short to medium-term. Australia is primed for increased foreign investment given its favourable market conditions, and investor focus on diversification across geographies, asset classes, and sectors.
2. ESG risk will heavily impact the likelihood of successful deal completion.
Historically, deal risk and due diligence was focused on commercial, financial/accounting, tax, and legal streams. However, an increasing number of fund managers are incorporating environmental, social and governance (ESG) risk factors and policies into their valuation methodology, due diligence process, and warranties and indemnities negotiations. This is largely driven by investor mandates and the introduction of new reporting requisites around the world.
Recent surveys have highlighted that more than 80 per cent of fund managers and general partners did not progress with an investment opportunity due to ESG-related concerns. This is driven by the view that ESG risk is a leading indicator for broader business risks. Failing to comply with ESG requirements adversely impacts talent retention, brand/reputation, and marketplace acceptance. There are also financial, compliance and reporting risks given the introduction of new standards from the International Sustainability Standards Board (ISSB 1 and ISSB 2). These standards are likely to apply to ASX200 and APRA regulated companies in 2024, before expanding to other reporting entities by 2028.
ESG and sustainability reporting requisites will heavily impact the likelihood of completing a successful deal. We anticipate PE funds to continue devoting greater resources to meeting ESG standards and compliance, and their investment committees will continue to demand the integration of ESG into their investment theses.
3. Global mega-trends of digitisation and sustainability will drive M&A activity.
Despite the negative impact of inflationary pressures, readily available capital should continue to fuel M&A activity. PE firms are recyclers of capital and their LPs require steady deal flow to fuel the cycle of capital deployment, returns, and new capital commitments.
We expect the evolution of the TMT and manufacturing sectors to be key drivers of M&A activity. While almost all sectors will undergo some level of transformation (digital and environmental), these changes are particularly prevalent in TMT and manufacturing – specifically in packaging.
Technology, media and telecommunications (TMT)
TMT deal activity remains robust, outpacing pre-pandemic levels across the sector’s verticals. Strategic acquirers and financial sponsors will continue to prioritise digital transformation and TMT upgrades to improve operational efficiency and bolster long-term growth potential. New technologies such as generative AI, and improved cybersecurity systems, will continue to generate significant interest from investors.
Manufacturing
As sustainability becomes increasingly important across all aspects of the economy, there will be increased scrutiny on manufacturing processes, products and even on packaging. Eco-friendly goods, including re-usable and returnable packaging, is not only driven by end-consumer awareness, but also political and legislative pressures. The packaging sector remains a fragmented market, but the sector will continue to evolve at a rapid pace. Innovation in this space will be targeted at improved sustainability and cost reduction. In turn, there will be an increase in M&A activity to drive evolving manufacturing capabilities and capture synergies.
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