By James Thomson


It’s the question Australia’s bargain-loving private capital deal makers are wrestling with: after 13 rate rises, where’s the distress in the economy?

Johan Krynauw, managing partner at turnaround specialist Allegro Funds, is watching the housing market closely. Not because the $4 billion private equity firm is planning a sudden entry into home building, but because he’s wary of a reverse wealth effect that could affect Allegro’s investment in consumer-facing businesses such as holiday park operator Discovery Parks and Everest Ice Cream.

Watching Discovery Parks forward bookings is another good way to see how households are holding up, Krynauw says.

But so far, there’s little to see.

“There’s not a lot of distress out there in the pipeline right now. But we do feel it’s coming,” he says. “You’ve had 13 increases in interest rates, a lot of those fixed-rate mortgages are coming off, but we haven’t seen a lot of slowdown in our portfolio companies.

“I think you’d have to say that the Australian economy is still very robust and we’re seeing strong demand. But you do keep a check on that.”

Allegro, of course, is famous for some of the most complex turnarounds in the private equity sector, including Toll Global Express, Slater & Gordon and, more recently, PWC’s government services offshoot, Scyne.

But Krynauw sees more opportunity coming. “We do think the next 12 to 24 months should be great investing opportunities from a bit more distress coming through.”

The Allegro dealmaker was part of a panel on private equity and private credit hosted in Melbourne on Monday by Wilson Asset Management’s listed invested company, WAM Alternative Assets.

Matthew Turner, head of Australian senior loans at private credit manager ICG, has relatively little exposure to consumer businesses in his portfolio, but likes to track the consumer by watching second-hand car sales; when the economy’s running hot, it can be hard to get your hands on a second-hand car.

But in what might be a sign of things to come, Turner says he has noticed movement in an adjacent sector. “Second-hand boat sales at the moment, they’re through the roof, so that’s a bad indicator for the consumer.”

For Peter Lyon-Mercado, partner at private equity firm Crescent Capital, inflation is the big indicator to watch; the house view is that it remains higher for longer, and the eventual pain from higher rates will hit the economy, creating bargains in the next couple of years.

“The view out there is that for private equity, at least, anyone that’s raised a fund in this current year should see some good buying opportunities at sensible valuations and I think deal flow is going to be stronger,” he says.

“We think there’ll be more restructuring required at a corporate level. Whether that is deleveraging the balance sheet or selling off non-core assets, I think it just creates more deal activity opportunities.”

But not quite yet.

“It’s not been a particularly good year as yet [for deal flow] but we’re starting to see more assets come through in our pipeline.”

The panel also helped illustrate the important and growing intersection between private equity and private debt. Turner says that about 80 per cent of his portfolios is made up of loans to the private equity sector, and while ICG plays at a very different end of the risk spectrum to turnaround specialist Allegro, the pair have partnered on the restructure of after-school care group Camp Australia.

Turner says being a consistent partner to the private equity sector through the economic cycle matters.

“We have different aspirations, and we take different levels of risk, but being comfortable with what those are and then working together I think ends up getting the best outcome for the industry.”

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