Adamantem Capital, an Australian private equity (PE) firm, is starting to plan exits for assets in its Fund I and meanwhile has yet to deploy almost half of its Fund II capital, co-founder and Managing Director (MD) Anthony Kerwick said.

The Sydney-based PE firm currently manages two buyout funds: Fund I of around AUD 600m and Fund II of around AUD 800m, with total funds under management (FUM) of around AUD 1.8bn, as confirmed by a spokesperson for Adamantem. It also announced the first close of its Environmental Opportunities Fund at AUD 150m in June last year.

Almost all the investments in Fund I are getting to the stage where “we will naturally think about an ownership change”, Kerwick told this news service. “We are not going to try sell the whole fund this year, but we are starting to think seriously about what the plan is.”

Fund I assets include aged care business Heritage Lifecare, horse feed business Hygain, community healthcare provider Zenitas, processed meat business Hellers and electrical products distribution business Legend, according to Adamantem’s website. IT services business Servian was exited in March 2021.

This news service reported in July 2023 that Hygain has started to look for buyers via Houlihan Lokey, while Legend Corp was also reported to be put up for sale with Miles Advisory advising, according to a report on the Australian Financial Review in September. Hygain has a Likely to Exit (LTE) score of 61 out of 100, while Legend Corp has a LTE score of 55, as tracked by Mergermarket‘s predictive algorithm* .

Adamantem is actively working on those two processes, while exit planning for other Fund I assets is not as advanced as those two, Kerwick said, adding that “there are other things that we are hoping to get an outcome later this year”.

Without specifying, the MD said that the next owner of Adamantem’s businesses could likely be another form of private capital, such as pension funds, given the emergence of private capital as long-term owners of businesses, or more diversified international PE firms that are increasingly looking to buy and hold assets.

Its portfolio assets should also be attractive to strategic acquirers, as most of Adamantem’s investment cases are “underwritten by a notion that there is eventually a strategic owner of the business somewhere in the world”, he said, adding IPO, however, is less likely to be an exit route for PE-owned assets now.

Adamantem does not plan to go down the continuation fund path, despite having got many approaches, Kerwick said. “I am not ruling that out, but it’s not something we are focused on.”

Fund II more than half deployed

Adamantem Fund II is now more than half deployed or “just hair’s breadth away from 60% deployment”, Kerwick said.

The fund currently holds investments in: commercial laundry business Linen Services Australia, hair products maker NAK Hair, carbon farming developer Climate Friendly, cardiology business Advara Heartcare, and refreshment casual dining business Retail Zoo, as per Adamantem’s website.

The PE fund manager is hoping to make a small number of new investments each year – in the range of two to four – although last year was slightly below average with only one deal, the Retail Zoo investment, Kerwick noted.

Since the very start in mid-2016, Adamantem has been focused on buyout opportunities in the mid-market in Australia and New Zealand – businesses usually valued between AUD 200-300m or smaller ones “when we really like them” – across three sectors: consumer, healthcare and business services, the MD explained.

It mainly looks at three types of deal opportunities: founder transition, taking private of small listed companies and carve-outs. There is always a steady flow of the founder transition category, independent of economic conditions, while carveouts is mainly a function of what large companies think of their Australia/New Zealand businesses, he said.

In the coming years there should be more public-to-private deal opportunities, as smaller listed companies are finding the public market less supportive, Kerwick said. “I would expect to do more public-to-private in the next three years than we did in the past three years,” he noted.

Adamantem would like to be the largest single investor – it is more about how significant it is on the investee company’s register rather than how much it owns, the MD said, adding that it owns everything from 41% to 95% of a company across Fund I and Fund II.

Admantem’s investment approach also integrates with responsible investing and ESG, which is “not an ideological commitment, but focused on returns generation”, he added.

New fund on horizon

A PE fund manager would typically consider raising a new fund by the time it has deployed 60%-70% of the current fund. “We haven’t started the active planning yet, but it is on the horizon,” said Kerwick.

Adamantem funds’ underlying investors, or limited partners (LPs), come from three categories: pension funds, family offices and insurance companies, both in Australia and overseas, the MD said.

In this higher interest rate environment, it would be logical for PE investors to expect higher returns when you can get a 5%-6% return in fixed income without risk, but a counterpoint could be that these investors are making multi-year allocation decisions over the lifetime of a PE fund, usually 10 years, he said.

Kerwick also said he has not heard from LPs regarding change of return expectations, but there is an increasing focus on liquidity from investors – “is the capital coming back?”

*Mergermarket’s LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.