Anna Ellis, Investment Director, discusses while uncertainty and election timing created a temporary slowdown, dealmakers have adapted by leaning into bilateral processes, earn-outs, and bolt-on acquisitions to navigate complexity and close gaps in valuation. As interest rates ease and confidence lifts, the market is finding new ways to get deals done efficiently in a more complex environment.
Alex Tandl: Anna I think you obviously spend a lot of time in the Australian mid-market. I'd be really interested to hear what you're seeing in that context. What's your take on what's going on?
Anna Ellis: Yeah, and it's interesting talking about the election and the timing of it. I think there's no doubt that there's a little bit of a pause, not just in industries which are exposed to public policy, but overall, when there's an election upcoming, everyone kind of goes, let's not do anything immediately.
So I think probably the first half of 2025 suffered a little bit from that in terms of transaction volumes. And I'm talking here specifically in the in the mid-market and lower mid-market.
I think overall when we sit back and look at what we've been saying and what the data is telling us is that calendar ‘24 actually saw a rebound in transaction volumes back to where they were pre COVID. It doesn't feel like that because we had the COVID peaks and all the transactions and exits that happened then. But certainly there was a marked increase in transaction volumes in 2024 on 2023.
I think we've already just talked about a lot of the uncertainty that's been plaguing discussions that we've had in this recording for the last couple of years. But I think perhaps to Frewen's point about private equities toolkit and GP toolkit, I think everyone in the market has found a way to get deals done.
And some of the trends we've seen because of the uncertainty and things taking longer, I think there's been no doubt an increase in bilateral transactions happening. I think that's a benefit for both the buyer and the seller.
And I think advisors as well, if there's an intermediary involved, it just, we know that time is a killer for deals. And so it just enables two parties to come together. They've got high conviction and to interact and agree terms a lot more quickly than it is if you do a broader auction.
And I think the other thing that private equity does well, and there's a lot of different types of GPs and we see a lot of the different ones at Roc, is that some have higher conviction in other sectors than others. And so if you can marry up the founder or the business owner with that GP like that makes for a much quicker process if they can align quickly. And as I said, time is definitely a killer of deals. So that's one thing we've seen.
I think another thing that emerged and perhaps was out of favour several years ago was contingent, contingent and deferred payments. So earn out. So I think perhaps we really weren't seeing many of those certainly during the COVID. And post COVID.
I think now that's been a way to navigate that uncertainty, whether that is how is the next 12 months going to play out? Are you really going to hit your forecasts or whether it's the external environment or maybe it's valuation related. And I think that's something else that has allowed parties to sort of come together to get deals done and also more quickly. So I think both sides are sort of more willing to look at those kind of things.
So there's some of the trends we've seen in that sort of mid-market, lower mid-market.
If I think about perhaps what the outlook is, I think I sense on the ground and you know, get the privilege to speak to a lot of founders and I think we're all consumers. I think the psychological impact of interest rates domestically coming down is actually really positive. So you know, one of the reasons interest rates come off don't it doesn't necessarily mean that the economy is going well, but I think psychologically that has a really positive impact.
So I think that we'll see more transaction activity on the back of that.
And obviously it also reduces that big bid ask spread between two parties and it makes valuations easier to align on. I think that's certainly something that we'll see over the next sort of period of time.
The other thing that's just not related perhaps to the outlook, but another observation that we've seen in the market is because growth has been harder to come by is that private equity have always had part of their playbook is to execute on transactions because they're really good at doing that.
But I think we've seen a heightened level of bolt on activity partially well probably mainly because growth has been a little bit slower. So building scale and growth more quickly within sort of by finite timeframes, there's been a lot more bolt on activity. So that's been keeping the industry busy.
