Private equity: Here’s what it is, and how the sector can be a blessing and a curse to retail investors

You may have heard of the term ‘Private Equity’ (PE) before. You may have seen a company been taken over by a private equity company. You may have bought into a IPO of a company that was owned by private equity. We thought it was worth writing an article about these faceless people. Who they are – not just generally, but who are some of the major players in Australia? And we’ll look at a few particular times when they have had substantial influence on public markets.

What is private equity?

The term private equity (PE) can refer to investment funds or the companies that operate the funds that buy and restructure other companies. Such companies may or may not publicly traded on stock exchanges, but may belong to any industry under the sun. They pool capital from various investors, including institutional investors (such as pension funds, insurance companies, and endowments) and wealthy individuals.

The goal is to generate returns from this capital by ‘flipping’ companies. In other words, buying and selling them – selling for more than the purchase price, a feat achieved by improving the particular company’s operations and financial performance.

Overall, private equity is usually successful at its goal and makes money for their original investors and themselves. The trouble we have with them is when they opt to sell out by listing on the ASX and selling to non-sophisticated investors who are bought by marketing hype and fail to ask the question ‘why should we buy when PE is selling?’ There are plenty of IPO disaster stories including Adore Beauty (ASX:ABY), Collins Foods (ASX:CKF) and Myer (ASX:MYR).

How can I invest in private equity?

The best way is to invest in private equity funds directly, but you will likely need to be a High Net Worth investor in order to do so. Alternatively, there are a few limited ways on the ASX to do so, such as by investing in VanEck’s Private Equity ETF (ASX:GPEQ), Pengana’s Private Equity Trust (ASX:PE1) and Cordish Dixon’s Private Equity Fund (ASX:CD1).

Who are some of the major players?

Let’s recap a few of the top players in Australia.

Quandrant Private Equity was founded in 1996 and is based in Sydney. It has raised 11 funds and has plenty of success stories including Kathmandu, Estia Health, Virtus Health, Red Rooster and APN Media. But many would hold a grudge against it for its part in the Adore Beauty listing. It bought a 60% stake from Kate Morris in 2019 and then sold half of its shares at the listing for $138m. But Quandrant retains its stake to this day and played a part in seeing off a takeover bid from THG.

Bain Capital is a global player with $185bn in assets. It was founded in 1984 and is based in Boston, Massachusetts. Remember the scruitany it copped during the 2012 US Presidential Campaign? This was all because it was co-founded by Mitt Romney. These days, Bain is best known in Australia the 95% owner of Virgin Australia and has sought to offload it through an IPO. This has not come to pass yet, but if it does: Caveat emperor – buyer, beware!

Pacific Equity Partners (PEP) is (according to the AFR) the largest private equity firm in Australia, founded by Tim Sims in 1998. In the past few years it has made a few deals with ASX companies including buying Healthia (ASX:HLA) and Citadel Group (ASX:CGL). Its bid to buy ReadyTech (ASX:RDY) was not so successful.

Let’s look at a couple of others briefly. BGH is a newer player, only founded in 2017 and named after the first letters of the surnames of Robin Bishop, Ben Gray and Simon Harle. It bought Virtus (ASX:VRT) in 2022 and Pushpay in 2023. TDM Growth Capital is the private equity firm that bought Guzman y Gomez to the ASX.

Conclusion

Private equity players are always worth keeping an eye on. But it is usually not worth buying something they are selling, especially when they’re selling to you as a retail investor. Why would they be selling if they saw more growth?

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