Record Point is an independent corporate advisory firm with operations in Sydney and San Francisco. We specialise in domestic and cross-border advisory services for public and private companies including mergers and acquisitions, capital raisings, corporate partnerships, debt advisory, restructuring, strategic reviews and valuations.
Following a busy 2019, the Record Point team is looking forward to more of the same this year. Before we look at what’s in store for 2002, let’s take a quick look at how the markets shaped up in 2019.
In 2019, the public M&A market was healthy notwithstanding ongoing geopolitical and economic uncertainty. M&A activity in the resources sector continued to dominate and was led by Wesfarmers’ acquisition of Kidman Resources which completed in September 2019. Other active sectors included financial services, health and aged care, TMT and infrastructure. While cash continued to represent the most common form of purchase price consideration, a number of deals used “stub equity” as a way of providing target shareholders an opportunity to have a continuing equity interest. Foreign bidders remained highly active representing approximately half of all bidders, however, there was a notable drop in Chinese and European bidders, offset by an increase in superannuation funds such as AusSuper participating alongside private equity firms in high profile transactions.
One of the key trends was private equity investors driving a number of public-to-private transactions, including BGH Capital’s acquisition of Navitas and tussle for Healthscope (ultimately acquired by Brookfield), KKR’s acquisition of MYOB and TPG’s acquisition of Greencross. A further major transaction involving private equity was KKR’s acquisition of iconic biscuit manufacturer Arnott’s for A$3.2bn.
The private M&A market was similarly robust with high levels of competition and strong valuations being achieved for high quality, growing businesses.
After a disappointing 2018 when the ASX200 index dropped 7%, 2019 was the strongest year for Australian equities of the decade. It ended up 18% for the year compared to an average annual return of 2% over the decade (excluding 2019).
Interestingly, in mid-2019, for the first time the index surpassed its peak level from October 2007 prior to the GFC-led crash. The large 2019 returns were achieved notwithstanding slowing global economic growth, a continuing US-China trade war, ongoing Brexit battles, low domestic consumer confidence driving challenging retail conditions and a stalling domestic property market. Nevertheless, equity markets were supported by low interest rates driving up asset valuations, unattractive bond yields and in Australia, billions of dollars continuing to flow into the superannuation system.
The IPO market in 2019 will likely be remembered for the string of IPOs which received publicity when they were terminated due to lack of investor support at targeted valuations. Examples include Latitude Financial Group, Onsite Rental, Education Centres of Australia, Property Guru, MPC Kinetic and Retail Zoo. The number and aggregate size of ASX IPOs declined and investors, flush with investable capital and starved of IPO issuances, showed a clear divergence in appetite to invest in existing listed companies (both their traded equities and follow-on equity raisings) as opposed to investing in IPOs.
The positive news is that there were a number of successful IPOs towards the end of the year, including Nitro Software and Tyro Payments, and the pipeline of upcoming ASX listings continues to build which bodes well for 2020.
What’s in Store for 2020?
Notwithstanding the uncertainties arising from the coronavirus outbreak at the end of December 2019, we are optimistic that M&A markets will continue to be strong.
As always, there will ultimately be a large number of known and as yet unknown factors influencing markets in 2020. We are not going to attempt to speculate on the answers to the unknowns surrounding current economic and geopolitical events. Like how much impact will coronavirus have on valuations and which sectors will be most heavily hit (and for how long)? How long will the US-China trade war go on for and who will be the long-term winners and losers? What will be the long-term impact of Brexit and the 2020 US elections on markets? Will a sense of calm and stability return to the volatile Middle East? We simply can’t say.
However, at a broad and thematic level, we continue to have conviction that fundamentals are supportive of continuing healthy M&A markets. Valuations remain buoyant, balance sheets are strong, interest rates are low, equity and debt markets are open and there is a large surplus of investible funds searching for higher yields in an otherwise depressingly low return environment. These are all key ingredients to provide decision makers with confidence to pursue M&A deals and we expect significant investment activity from financial parties (such as private equity, domestic and international pension funds, family offices / high net worth individuals) in both private and public companies.February 27th, 2020