Participate, Profit & Celebrate:
Q.: The second half of 2010 was said to have had record-breaking M&A activity in Australia. In your opinion, do you agree with this trend and what factors do you think fueled this jump, if at all?
Mr. Koczkar: I don't think you can really say that M&A activity in Australia was particularly strong in 2010. We saw a couple of major asset privatizations and there were a number of resource transactions early in the year before the Resource Super Profits Tax or RSPT was announced, which ultimately stalled deals in this space.

I'm sure the uncertainty surrounding the election and investor concern regarding sovereign risk in Australia also had an impact on M&A volumes. On the whole, 2010 was a pretty quiet year for private equity in Australia. However, notwithstanding the low levels of market activity, we were very pleased to get the Energy Developments acquisition completed in the early part of the year.
Q.: From a mid-market private equity perspective, what sectors in the Australian economy present the best prospects for investments over next 12 months, and why?
Mr. Koczkar: Domestic M&A remains relatively healthy in 2011 and this is what most interests PEP as the advisor to Australia's largest domestic private equity fund. We have seen more activity from private equity this year with firms keen to invest as valuation expectations become more realistic.

For offshore players, lower valuations of Australian companies are, to some extent, offsetting the high Australian dollar that might otherwise be seen as an impediment to inbound M&A. For existing offshore owners of local assets, the high Aussie dollar also means it's a good time to realize AUD denominated investments.
Q.: What sectors in the Australian and New Zealand market continue to present the best potential investments for PEP and why?
Mr. Koczkar: PEP has an interest in all sectors and is focused on continuing to build a diversified portfolio for the benefit of its investors. At the moment, we continue to see opportunities in financial services, consumer products, healthcare and industrials, which we believe present attractive growth characteristics in the current environment and provide a platform for us to add value due to our experience in these sectors.
Q.: Throughout 2010, funding in Australia has remained difficult. What is the current state of access to lending?
Mr. Koczkar: Lending markets have significantly improved over the course of the last 18 months and are operating fairly normally, albeit with pricing higher than what was available before the financial crisis. We are seeing good support from domestic banks as well as a number of international banks, with some of them expanding their teams and others are reestablishing local teams having previously serviced this market from their off shore offices.
Q.: Could you elaborate on debt markets impact on buyout deal structures, including on PEP?
Mr. Koczkar: Banks are being more careful in selecting the sponsors and targets they will support and higher debt pricing has led to lower levels of gearing in acquisitions overall. Lower levels of debt will put more pressure on sponsors to find earnings growth to drive value creation in their portfolios. PEP continues to have positive relationships with lenders and this is fundamental to our business. Our historic focus on operational improvements and earnings growth have served us well and continue to be important drivers of differential fund performance.
Q.: Why does it appear to be that PE deals on average are believed to take longer to close in Australia?
Mr. Koczkar: We're very flexible and we tailor our approach to specific circumstances. In many private treaty situations we work to a tight timeline. However, public transactions involve a more open process, which creates a need to communicate with a wide variety of stakeholders and thereby accounts or the perception of an extended transaction process.
Q.: What is Pacific Equity Partner's due diligence process?
Mr. Koczkar: PEP generally reviews over a hundred deals a year. Of those, we would do detailed due diligence on maybe thirty, make indicative offers for a handful and final offers for maybe a couple. Our business model relies on a thorough review and assessment of opportunities for our investors.
Q.: How has increased competition among private equity players impacted the deal source process and valuations?
Mr. Koczkar: Australia has always been a highly intermediated market with the vast majority of assets sold through formal sale processes. There is nothing new about this and we relish the competition but it is also worth noting that PEP sources deals in a variety of ways and our strong relationships with industry gives us access to a multitude of opportunities. Also, we have noticed that competition in the Australian market has moderated in the past couple of years as fewer firms have the funding and the relationships to get deals done quickly.
Q.: Pacific Equity Partners is believed to have the largest private equity fund in Australia and New Zealand, what is the investment criteria for the PEP FUND IV?
Mr. Koczkar: First and foremost, we look for experienced, capable management teams we can support and work well with. We like established businesses with strong market positions, strong cash flow and strong growth potential. PEP looks for opportunities across all sectors, excluding perhaps industries which have a high degree of commodity price risk, exploration risk, or regulatory risk.
Q.: What is underlying investment philosophy for the PEP FUND IV?
Mr. Koczkar: We are what I like to call "operational risk" investors - comfortable with taking risks on new products, on capital efficiency and technology programs in new market segments or in new geographies. By way of example, we wouldn't invest in a highly speculative mining exploration company but businesses that are exposed to the current resources boom in Australia do appeal to us. We invest only in companies with their principal operations based in Australia or New Zealand with an enterprise value of at least A$300 million.
Q.: How does PEP's origination team identify compelling buyout opportunities across a diverse group of sectors?
Mr. Koczkar: We have a deep team with significant experience in the Australian and New Zealand capital markets and across all industries in which we invest. We draw upon our financial market and industry networks to get deals done.
Q.: PEP has opted out of investing in Gambling and Tobacco companies, what are the risks associated with these sub-sectors of the market?
Mr. Koczkar: In consultation with our investors, we have formed the view that there are enough good opportunities in the local Australian and New Zealand markets without having to consider these industries. Our collective decision not to invest in these sectors was an ethical one. However, the significant and increasing regulatory uncertainly would make investment in these sectors challenging.
Q.: How does PEP create value and engage with the management team of its portfolio company?
Mr. Koczkar: We work very closely with the management teams of our portfolio companies and would not invest in a company if we weren't confident of our ability to work well together. PEP partners have a wealth of experience across industries and two or three PEP representatives would usually sit on portfolio company boards and provide regular advice and assistance to management teams.
Q.: What is your unique strategy in growing your portfolio companies?
Mr. Koczkar: We trust our management teams to deliver and we will provide additional capital for organic growth and acquisitions where there is a strong business case. Our most successful investments have involved companies that have been constrained from investing in growth under other ownership structures. We like to improve operations and facilities to achieve a step change in growth.
Q.: Can you provide an example of a successfully grown portfolio company?
Mr. Koczkar: Griffins was an iconic New Zealand brand and is now a major exporter of biscuits to Australia and Asia. We also like to explore opportunities for acquisitions as we have done through numerous bolt-on deals for Link Market Services, which is now a truly global player in share registry.
Q.: How does PEP's origination team identify compelling buyout opportunities across a diverse group of sectors?
Mr. Koczkar: We have a deep team with significant experience in the Australian and New Zealand capital markets and across all industries in which we invest. We draw upon our financial market and industry networks to get deals done.
Q.: What are the latest trends in Australian PE exits?
Mr. Koczkar: We seek the best opportunities for our investors to realize the value we have created, as any vendor would. Private equity exits in Australia have been challenged recently. There have been some recent trade sales - including our exit of Tegel - but the IPO market has been virtually shut.
Q.: Does PEP have a preferred exit strategy?
Mr. Koczkar: Our view is that we will continue to pursue opportunities for a public market sale where it makes sense, but trade sales are currently more common and there is also a secondary private equity market emerging. We will always evaluate the most logical path to exit based on the fundamentals of the asset.
Q.: Congratulations on the sale of the firm's stake in Tegel Foods. How was this deal originated and how did PEP create value?
Mr. Koczkar: Tegel is a great business and we are very proud of the management team and the strategy we were able to deliver during five years of ownership. When we purchased Tegel in 2005, the business had been capital constrained. We were able to bring a high level of strategic focus to bear and bolster the management team. Working with management, we developed a new strategy for the business that focused on the core business of delivering fresh produce to New Zealand consumers before establishing opportunities to diversify into value-added small goods and exports, which now comprise over a third of Tegel's revenues.
Q.: In your experience, how is the sale process different between a strategic buyer versus another PE fund?
Mr. Koczkar: Different buyers will have different motivations and it's hard to generalize. But it is logical for strategic buyers to consider factors like access to new markets and new customers as well as synergies and efficiencies that could be gained from bringing the business together with existing operations. PE buyers need to have a more focused view on value based on cash flows from the business in isolation and what might be achieved with investment in top-line growth opportunities.
Q.: What makes PEP unique in the universe of other mid-market Australian private equity firms?
Mr. Koczkar: We are experienced, capable advisors and have broad relationships with financial markets, lenders and industries in this market. The depth of our team and our varied industry experiences in Australia, New Zealand and overseas is an advantage in the way we approach investments and support our operating companies. Our track record of returns, which for our closed funds, has seen us deliver in the top quartile sets us apart and as a result we continue to have many long term, repeat investors.
Q.: In closing, what book are you currently reading?
Mr. Koczkar: I'm currently reading A Whole New Mind by Daniel H. Pink which explores how the information age is changing the way we think, work and operate resulting in dominant "right brain" - qualities like inventiveness, empathy, and creativity. I have also just finished reading The Broken Shore by Peter Temple, which is a crime novel about a homicide investigation that sends ructions through a local indigenous community and is set near where I grew up. It's very well written and a gripping read.

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