Capital commitment through market cycles

Following a downturn in markets, we discuss Roc Partners’ outlook for the deployment of capital in direct private equity as well as the opportunity set within different segments of the Australian market.

Anna Ellis: Mike, you've been in the private markets industry for 25 years plus - you've seen a lot of cycles, there's a lot of noise, there's a lot of uncertainty in the market. What's your view on capital deployment opportunities over the next half and into 2024?

Mike Lukin: When you're trying to deploy capital into private markets, you can't pick the bottom. It's hard enough to pick the bottom in listed markets. It's even harder to pick the bottom in private markets because transactions take time to percolate through. So, it might be a business that our GPs, our team, are looking to invest with, and that'll be percolating in the background for six months, 12 months. We're looking at something now that we've been talking to them for over 12 months. We're only now starting to get to the point where our expectations of value and theirs are starting to align. We're going to see more of those types of opportunities as maybe the uncertainty of the future starts to kind of dissipate, maybe more certainty around where we land with wages, with inflation in this country. That'll give people more confidence around the kind of numbers they're bidding off.

Maybe that gives them the confidence given they've got more certainty around the economic conditions and the earnings of these businesses to pay a little bit more in terms of multiple. And at the same time, vendors will have kind of reset their expectations on value. No transactions being done for 18 months, two years. That tends to be the kind of memory that most people have in around financial markets and transactions.

And we've seen this plenty of times before, the global financial crisis, the market collapsed down 50%. Not a lot of transactions got done for the two years prior. Because the realistic scenario is if you've got a good business and you're not over geared and you're still selling creating a dividend stream for yourself. Thinking about a private business, a family owned business, an entrepreneur owned business, that scenario means I know I'm not going get value for my business. Maybe I only take a $1 million dividend out this year rather than a $10 million I took out in 2007, but my business is worth a lot more than the 10 million that I'll get for it today.

So really, taking a longer-term view around finding that right time in the cycle, being patient around deployment, but also being active in the market. So if you are an LP in a fund, you've got to keep putting commitments out there because you just don't know when the cycle will turn. And so being prepared by having commitments outstanding that can be drawn down by private equity managers in this type of market is a really smart strategy. Most people tend to try to pull back in this market, whereas now's the time to be deploying capital from a commitment perspective and then allowing the private equity managers, broadly in the market to out identify opportunities over the next six months, next 12 months, next 18 months, as the fog in markets tends to lift then and we start to see more transactional activity emerge.

Anna Ellis: And so do you see it as a positive thing that there is so much dry powder in the Australian private equity market at the moment?

Mike Lukin: Yeah, look I think the concept of a lot of dry powder you need to segment into markets, and where the opportunity set is, and