Over recent months Australian financial journalists and the broader media have developed a paparazzi-like fascination with the world of private equity. While there is nothing new or really that exciting about private equity, Australians have not witnessed the “celebritisation” of so many people with accountancy degrees since the heady days of the late 1980’s.
How did we reach this point? The world has been awash with liquidity the past few years and alternative asset classes such as hedge funds and private equity funds have been the beneficiaries of this liquidity.
The sheer volume of liquidity has forced these private equity funds to look for new homes to put this money and Australia has been a beneficiary. The unspoken truth however is that no private equity firm likes to return money to investors due to a lack of investable opportunities, as returned money potentially goes to a competitor and that is not a good look for a private equity firm.
Consequently deals have to be done, even if that means in comparatively expensive markets such as Australia, where a few years ago deals were measured in millions not billions.
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The return of KKR to the bidding war for the Coles group is a testament to this ongoing Australian asset feast underway.
The involvement of both KKR and Wesfarmers in this bidding war for Coles is intriguing on many levels. Australian investors however should be concerned not about whether another big international private equity firm such as KKR is successful in buying an Australian icon but whether Wesfarmers is in an aggressive bidding war.
Why? Well because Wesfarmers has a reputation in corporate Australia of not overpaying for assets. Should Wesfarmers therefore eventually pay what is perceived by the broader market to be too high a price for Coles then the signal this sends is a worrying one, particularly with the Australian market at all-time highs.
It also raises questions as to how you can justify paying potentially billions more for a company whose own management team has struggled to provide reliable forecasts in recent months.
It would make the comparisons to the euphoric striped shirt and white collar days of the late 1980’s only more compelling.