By Mike Thomas
We know that plenty of things drive economic growth – and Australia needs economic growth if we are to maintain the living standards and prosperity we sometimes take for granted.
At Deloitte Access Economics, we’ve estimated the value delivered by businesses, industries, and even “global icons” – from small business, the advertising sector and greater gender diversity across business management, to the Sydney Opera House and the Great Barrier Reef.
In 2013, we looked at the economic contribution of private equity (PE) in Australia. We’ve now updated our analysis, and confirmed again that the sector remains a key driver of growth, job creation and innovation across many industry sectors.
Using data for FY2016, we’ve found that local firms under PE ownership accounted for $43 billion in total value added to the economy (equal to 2.6% of GDP) and supported 327,000 full time jobs. If PE investee firms were an industry in their own right, their economic contribution would have exceeded that of the insurance and superannuation industry, coal mining or telecom network operators.
The impact of PE is reflected in the performance of firms under PE ownership. In FY16, they achieved average revenue growth of 20% and EBITDA growth of 8% over the year. And they expanded the size of their workforces by an average of 24%. By comparison, over the same period, economy-wide company gross operating profits fell by 2.6% and employment in the wider economy grew by only 0.3%.
More than 85% of PE investee portfolio companies also introduced some type of innovation (2-3 times more than businesses in general) and were more likely to collaborate with others to unlock the innovation potential within their business.
But these benefits aren’t just happening in the worlds of spreadsheets and economic and financial modelling.
Our report includes a number of real-world case studies that demonstrate just a few of the very tangible ways in which private equity firms have invested in businesses and then identified, driven and delivered financial and innovation value both in terms of economic activity and jobs.
For example, in 2005, Pacific Equity Partners (PEP) acquired ASX Perpetual Registrars, renamed the company Link Market Services (LMS) and identified a growth opportunity in the superannuation fund administration market that would align with its purchase of Australian Administration Services (AAS) the following year. PEP invested in rebuilding AAS’s ageing IT platforms and, around the same time, saw opportunities to expand LMS’s services, leading to LMS’s acquisition of investor relations specialist Orient Capital, also in 2006. In 2007, LMS, AAS and Orient merged to form the Link Group which, over the past decade, has successfully brought together over 30 complementary businesses to grow product offerings, expand globally, and deliver significant revenue, earnings and employee growth.
Another? Canberra Data Centres (CDC) was already a market leader in data centre co-location services to the Federal Government, and well positioned to capture future growth opportunities. It was, however, constrained when it came to the capital intensive business of building new data centres. Quadrant Private Equity acquired a 49.9% share in CDC in 2014 and helped the business to access the institutional funding needed to accelerate investment in new data centres, improved management discipline, and increased revenues, earnings and workforce.
And Advent Partners acquired a shareholding in fresh herbs, spices and seasonings operator (and exporter) Gourmet Garden in 2013 when the business was looking for growth funding and to commercialise product line innovation. In addition to providing the funding needed for investment in a state-of-the-art production facility, Advent helped strengthen the management team, enhanced reporting and helped bring a disciplined approach to overseas expansion to deliver impressive revenue and earnings growth.
These are just a few examples of the way in which PE is helping to unlock Australia’s growth and innovation potential.
For access to the full report please click here.
Mike Thomas is a Deloitte Access Economics director. He co-authored a report for the Australian Private Equity and Venture Capital Association Ltd, Private equity: Growth and Innovation.