Cross-border agendas in Australian PE are becoming more sophisticated as fund sizes increase amidst broader economic digitisation. But few investors dare to take their own operations overseas

When Quadrant Private Equity surpassed AUD 1bn (USD 660m) in fund size, it became even more international. Overseas LPs accounted for 60% of Quadrant Private Equity No.6, which closed at AUD 1.15bn in 2017. The firm returned to market three years later and raised AUD 1.24bn, with international investors putting in 55% of the capital.

This coincided with a greater focus on an existing thesis for growing portfolio companies overseas. Larger funds have enabled the firm to build out bigger businesses with tentacles and customers on the doorsteps of potential foreign buyers.

There was some traction in this vein with Quadrant’s sub-AUD 1bn vehicles. Real Pet Food Company and employment services player APM Group were acquired in 2015 and 2017 for AUD 410m and AUD 455m, respectively. Expansion into North America, Europe, and Asia featured strongly in the value creation plans and played a role in the exits.

Real Pet Food was sold in 2017 to a consortium that included Asia-based Hosen Capital, New Hope Group, and Temasek Holdings for AUD 1bn. Madison Dearborn Partners, a US mid-market private equity firm, acquired APM in 2020 for an enterprise value of AUD 1.6bn.

Now, though, this cross-border playbook is expected to be the norm rather than the exception. Fund No. 6 generated a 2.8x return when Probe CX – a business outsourcing provider that Quadrant and Five V Capital helped establish a regional footprint – was sold to KKR last year. Darrell Lea, a candy brand that has grown aggressively in the US and UK, is also considered ripe for exit to a global buyer.

“We recognise the value of having a bigger addressable market for our businesses, which informs getting a more favourable outcome at sale,” said Alex Eady, a managing partner at Quadrant. “So, to the extent we can demonstrate that a business can grow outside Australia, that tells the buyer there’s much more runway and allows us to attract more buyers from overseas.”

Eady notes cross-border momentum of this kind has picked up substantially in the past few years, adding that sponsors in Southeast Asia represent an increasingly attractive exit channel.

Small beginnings?

There are some expectations that this effect could be amplified by Chinese GPs seeking to internationalise their offerings amidst global apprehension for their home market. Three investors told AVCJ they had observed Chinese private equity firms assessing opportunities in Australia and even exploring the possibility of building out a local presence.

Still, the idea that Australian private equity is internationalising its portfolios and exit channels in step with the growth in assets under management (AUM) appears to be a work in progress. Local managers have collectively closed eight funds of AUD 1bn or more in the past 10 years. During that period exits to foreign buyers have wavered erratically.

A relative peak came in 2021 which saw 25 exits to foreign buyers worth a combined USD 8.6bn, according to Mergermarket. The figure for 2023 to date is USD 1.5bn from eight deals, on par with 2020 but down substantially from 2017’s 16 exits worth USD 5bn.

Internationalisation in terms of investments made by Australian GPs outside of Australia-New Zealand has been equally erratic. Total outbound PE and VC investment in the past 10 years has oscillated in a range of USD 1.1bn to USD 7.7bn a year, according to AVCJ Research. This excludes a pandemic-driven total of USD 13.7bn in 2021; the number for 2023 to date is USD 3.5bn.

In more anecdotal terms, the gravity of the home market can be observed in a dearth of overseas expansions by GPs themselves.

AVCJ challenged several local investors to identify any historical activity in terms of PE firms opening offices overseas. One investor with a middle-market GP said his firm had attempted to post staff in Singapore, but the experiment was short-lived, and no office was set up.

Otherwise, the only example offered is CPE Capital, which opened a Singapore office in 2008 and closed it in 2020. The prevailing speculation is that an Australian-style investment lens was brought to a market better suited for small-ticket growth deals. In a note to LPs, referenced at the time of the office closure by local media, CPE CEO John Haddock cited “uncertain times.”

Venture capital has seen more traction on this front, although not substantially. The standout example is Square Peg Capital, which opened in Tel Aviv and Singapore within three years of its inception in 2012. It now has AUM of around USD 2.5bn. Artesian, a Sydney-headquartered impact investor with USD 1.1bn in AUM, operates out of offices in Shanghai, Singapore, Jakarta, New York, and London.

In venture, there is a structural constraint in the form of the government’s VCLP and ESVCLP fund formats, which incentivise domestic investments through tax breaks. In the middle market, there are other discouragements.

“There’s a tension with LPs trying to keep GPs in an Australia-mid-market-buyout box in their matrixes,” said a second investor close to an Australian PE firm that explored an Asian expansion. “For the GPs that have become billion-dollar AUM platforms, it’s not easy to do that because most LPs are telling you not to get out of your lane. The GPs know it’s not going to resonate with LPs.”

Going global

Still, snowballing AUM and an increasing prevalence of AUD 1bn-plus funds have put investors under more pressure to articulate how those funds will be deployed. In most cases, this has translated into broader strategies in terms of targeting companies at various levels of development and more active programmes for expanding portfolio companies overseas.

Historically, the US and UK have been the dominant expansion markets in this sense, given cultural ties and the facility of language. The Asia opportunity, by comparison, is seen as more case-by-case.

Robert Radcliffe-Smith, a managing partner at Advent Partners, is among the Asia optimists, flagging growing middle-class appetites in sectors such as education, consumer, and healthcare. He also notes that because Australia’s population includes significant first- and second-generation immigrants who feel comfortable doing business in Asia, the region has become more accessible.

Small-ticket consumer categories often boast the most conspicuous success stories, with ice cream maker Frosty Boy arguably the key case study from Advent’s portfolio. The company – acquired in 2017 for an undisclosed sum – has expanded into 70 countries globally, with Asia generating close to 60% of revenue. Its founder, Dirk Pretorious, described sales for 2023 as being at record levels.

The general digitisation of the Australian economy is playing into this theme as well. Indeed, Radcliffe-Smith added that two of his tech-oriented portfolio companies are seeing strong traction in terms of Asian expansions.

“There is always the challenge of recruiting top talent for relatively unknown Australian businesses entering new markets. However, with overseas tech coming off the boil over the past 18 months, including staff shedding by VC-backed companies, our tech portfolio companies have found it noticeably easier to attract great staff,” he said.

“Compared to 10 years ago, it’s much easier for Australian companies to launch in US markets.  In the past, they had to make themselves appear American. Now our Australian businesses are receiving a good reception provided they adopt the local terminology and local support staff.”

The logic of the cross-border tech opportunity is easily understood in the asset-light nature of software businesses. Emerging impediments related to data sovereignty regulation are seen as non-trivial but manageable hygiene issues. The most pressing challenge is for businesses with a Europe growth angle, which must comply with the EU’s General Data Protection Regulation (GDPR).

“The growth in the digital economy is making international commerce easier. After a tightening of borders around COVID, there are greater opportunities for international trade again,” said Jeremy Samuel, a managing director at Anacacia Capital, a middle-market GP that has expanded its activity to include e-commerce and VC-oriented business models in recent years.

Tech specialist Potentia Capital is at the forefront of this theme. Two-thirds of the firm’s portfolio is active overseas – primarily in the US, UK, and Europe – and this is attributed squarely to the scaling advantages of digital models.

Even Potentia’s most glaringly domestic play, an enterprise-facing superannuation platform called SuperChoice, is flirting with overseas expansion as UK pension authorities tilt toward Australian-style schemes.

Business first

B2B software is the preferred business type in this game plan, in part because B2C models are associated with heftier upfront marketing costs and the need to enter markets through potentially costly acquisitions. There is also the notion that B2B tech benefits from a broader and more reliable set of potential strategic buyers.

“There’s been a lot of venture funding in Singapore and Southeast Asia in the last few years and a lot of B2C businesses there are pretty interesting, but we haven’t seen many homegrown B2B businesses coming up in that region yet,” said Michael McNamara, a partner at Potentia.

“As Southeast Asian markets mature, they will be a huge expansion and exit opportunity, but for B2B enterprise software, the more likely acquirer is still going to be from the US and Europe.”

Potentia’s two main investments that explored non-Western expansions – payroll software provider Ascender and mining software provider Micromine – help illustrate the challenges facing Australian companies targeting Asia and other frontiers. Exits have been agreed for both companies, with Ascender generating Potentia a 16x return and Micromine set to achieve an almost 10x return.

The Micromine sale is currently on hold, as the buyer, UK-based AspenTech awaits completion of a sanctions-motivated pull-out from Russia. Micromine has reduced its staff in the country from about 40 to eight. The final local contract is expected to expire next year, which should allow the USD 623m sale to AspenTech to be formalised.

Potentia acquired a controlling stake in Ascender in 2015 at a valuation of USD 25m. The company’s footprint expanded from 16 to 31 countries before it was sold to US-based Ceridian for around USD 500m in 2021.

The sticking point was a missed opportunity in China. Ascender had lined up a merger with a Chinese business, but its customers were pivoting away from the market, effectively nixing the deal. It’s worth noting that in both the Micromine and Ascender cases, the challenge has been more about desires to avoid exposure to certain markets than tech or data sensitivity per se.

“We have discounted China as an attractive end-market to grow businesses into much more than we would have three years ago,” Quadrant’s Eady said, noting that most of his firm’s businesses are not digitally centred.

“Five years ago, we would have identified China as a growth opportunity, perhaps we would have leveraged an existing base there and expanded it further. Today, we would be more cautious of any existing volume of a business selling into China as a result of that geopolitical risk.”

Perhaps counterintuitively, the geopolitical question is arguably less relevant at the tech and venture end of the spectrum given the dominance of the US as a home for B2B models and the idea that China’s B2C needs are already serviced by domestic players.

Alister Coleman, founder of Folklore Ventures, observed that Australian start-ups with global ambitions have seen little impact from China-US tensions, suggesting that emerging data sovereignty issues could prove a bigger challenge for regulators than for entrepreneurs.

“Clearly, we’re going to see a concentration on limiting access to business data and data within critical industries that have long-term security implications, and this extends to cyber, defence, advanced research and deep tech, healthcare, education, energy generation and banking,” Coleman said.

“However, the immense productivity gains and enabling features of AI [artificial intelligence] will lead individuals and businesses to work around forms of regulation that stymie those desires.”

Unicorns undeterred

Australia’s most valuable start-up, design and workplace collaboration platform Canva, best illustrates these points with staff on the ground in the US, China, the UK, and the Philippines, as well as users in 190 countries.

Blackbird Ventures, which backed the company in 2013, marked down its valuation of the company from USD 60m to USD 26m in July last year. Nevertheless, the VC firm’s Fund I position was up 337x as of its first realisation from the company last August, when USD 150m worth of shares were sold to US investors Coatue Management and Iconiq Capital.

“[The secondary market] gives us some control over when we create liquidity rather than being in a timeline for companies listing or getting acquired,” Blackbird co-founder Rick Baker, told AVCJ in March, referencing Canva.

Airwallex, a cross-border payments platform sometimes described as Australia’s second-largest start-up, also demonstrates how digitisation is feeding the internationalisation of the local ecosystem. Its USD 900m in funding to date includes a USD 100m round last year featuring Canva-backer Square Peg, as well as China’s Tencent Holdings and several US-based VC firms at a valuation of USD 5.5bn.

That valuation is more than 120x Airwallex’s Australian revenue, according to figures filed with the Australian Securities & Investments Commission (ASIC) for 2022 and cited by local media. This has been interpreted as revealing not only the dominance of the overseas footprint but a massive Chinese business. Overall revenue for the year was USD 59.3m, while profit came to USD 17.5m.

Airwallex’s nimbleness appears to allow it to do business without political hang-ups, or at least in spite of them. The company’s headquarters moved from Melbourne to Hong Kong in 2018 and then again to Singapore earlier this year.

Tushar Roy, a partner at Square Peg who set up the firm’s Singapore office, sees this kind of activity as part of growing ecosystem ties between Southeast Asia and Australia. He expects more PE and VC portfolio companies to set up bases across the two regions in the next few years.

“In the last 12 months, we’ve noticed there are many more GPs not in Australia that are trying to enter Australia. These are venture investors by and large but also some mid-stage investors. Some are even exploring building out teams in Australia,” Roy said.

“It does increase competition, but generally, I think it’s good for the market. These things evolve as a function of people’s networks, and the networks of people who are now exploring Australia are in ASEAN. When they connect their companies and customers or other investors in their networks, I would expect more cross-pollination of both investing activity and company growth across the ANZ-ASEAN corridor.”