Introduction

Welcome to the second edition of our Private Equity Newsletter.  2010 was a busy year for private equity – in the past 12 months, we have worked on deals worth in aggregate over A$1 billion. Many commentators are foreshadowing that 2011 will see a flurry of activity in the private equity space, particularly sell-side activity involving portfolio investments held by PE funds through the global financial crisis.  

In this edition, we:

  • discuss Australian private M&A activity in 2010, with a particular focus on key deal trends observed and how they compare to deal trends in other jurisdictions
  • report on the increasingly common use of warranty and indemnity insurance in Australian M&A deals
  • report on specific issues that arise in the acquisition of an insolvent business and provide some guidance on participation in such transactions
  • highlight a selection of key deals we have worked on in the last 12 months
  • discuss recent developments in private equity abroad
  • ask one of our Australian private equity lawyers some questions on-the-run, and
  • examine some recent policy and disclosure requirements impacting the sector.

As a sponsor and partner of the Australian Private Equity & Venture Capital Association (AVCAL), we will be working on exciting initiatives and co-hosting various events with AVCAL, including hosting an insightful PE boot camp which was held on 17 March 2011, featuring John Brakey of KKR Australia, Tom Rotherham of Hermes Fund Managers Ltd, Michael Dance of Redhill Education and Nick Humphrey of Norton Rose Australia.  We look forward to seeing you at future events and working with you in what looks to be an exciting period ahead.  

Kind regards

Nick Humphrey
Partner and Head of Private Equity

Market trends

Australian Private M&A trends in a record-breaking year for Australian M&A activity

Although 2010 commenced with somewhat lacklustre M&A activity, with activity in the June 2010 quarter being lower than in the December 2009 quarter, a late flurry of transactions in the second half of 2010 resulted in a record-breaking year in which Australian M&A exceeded US$100 billion for the first time.  In this article by Nick Humphrey and Crystal Png, we review interesting deal trends in the Australian private M&A space identified in transactions completed in 2010 in comparison to deal trends in other jurisdictions.

Key issues in insuring an M&A deal

Warranty and indemnity (W&I) insurance is fast becoming a common instrument to de-leverage deal risk in the Australian M&A landscape.  W&I insurance is becoming more common in all types of negotiated M&A transactions, with general corporates and individuals alike being lured by the benefits that such insurance has to offer.  This article by Nick Humphrey and Steven Torresan was published in the Australian Private Equity & Venture Capital Journal in December 2010 and sets out key issues to be considered in relation to W&I insurance.  

Buying an insolvent business

Many valuable lessons were learnt in the aftermath of the global financial crisis.  This article by Stephen Giles reports on specific legal and commercial issues that need to be considered in the context of acquiring an insolvent business.

Recent Private Equity deals

  • Advising CHAMP Ventures and the management shareholders of TSmarine, a subsea specialist oil and gas service provider, on the divestment of their equity interests in TSmarine to Fugro N.V.
  • Advising a New York based underwriter in relation to risks associated with writing a tax insurance policy in connection with a A$200m+ transaction.
  • Advising Appen (a portfolio company of Anacacia Capital) on the acquisition of Butler Hill Group, LLC, a Connecticut based provider of linguistic consulting services.
  • Advising Macquarie Capital Group Limited and the Macquarie Special Situations Fund on the acquisition of a 37.5 per cent interest in "3P Learning" - the company responsible for the 'Mathletics' and 'Spellodrome' online educational products.
  • Advising CHAMP Ventures on its acquisition of a significant minority interest in Australia's leading female active wear retailer Lorna Jane which has in excess of 75 retail stores throughout Australia and Singapore.
  • Advising a New York based underwriter in relation to risks associated with writing a warranty and indemnity insurance policy in connection with a US$600m+ transaction.
  • Advising ANZ Private Equity and other shareholders of Centaman Holdings Pty Limited, world leader in visitor attraction management solutions, on the divestment of their interests in the company.  
  • Advising United Equipment (a portfolio company of AMP Capital Investors) on a merger with the exclusive Australian licensee for "Cat Lift Trucks", creating one of Australia's largest lift truck distribution and rental businesses.
  • Advising ANZ Private Equity and API Security (a portfolio company of ANZ Private Equity) on the respective sale of API Security businesses to Gunnebo and QRSciences.
  • Advising ANZ Private Equity and shareholders of OTE Pty Limited on the sale of their interests in Information Technologies Australia, Australian leader of call automation solutions, to Nuance Communications, Inc.
  • Advising the founders of the highly successful Pandora Australian jewellery business on the sale of the Australian entity to its Danish supplier.
  • Advising Cookies Australia Pty Limited (the owners of the Australian licence for the "Mrs Fields" brand) on the acquisition of the "Cookie Man" business.

Global Update

The Power of the Network

In January 2011, the Institutional Limited Partners Association released an updated version of its Private Equity Principles, which were developed to drive private equity industry best practices and to support long-term relationships between general partners and limited partners.  This report by Ian Moore summarises the key amendments to the previous version of the Principles.  

New Shanghai Rules on Foreign Funds and Foreign Fund Managers

The Shanghai Government released the "Implementation Measures on the Pilot Program of Foreign Invested Equity Investment Enterprises" to the public in January 2011.  This article by Andrew Abernethy and Sun Hong reports on the procedures and requirements for establishing qualified foreign-invested fund managers and foreign-invested funds in the PRC, as set out in the measures.

Team focus

Ben Smits (Senior Associate – Sydney office)

On the clock

  1. How long have you been with Norton Rose and briefly describe your practice?
    3 years with Norton Rose working almost exclusively in PE and VC but practising as a corporate M&A lawyer almost 10 years.  We have a vibrant and dynamic team and are privileged to work for some of APAC's most iconic captive and standalone investment houses.
  2. What is an interesting deal you have worked on and what was something about the deal which is important or memorable?  
    CHAMP Ventures' investment into Australia's leading female active wear retailer, Lorna Jane, in 2010.  The deal was interesting and unique for several reasons including the minority stake, the need to think pragmatically about the best way to pitch a deal for a founder whose identity is tied to the business and also setting out an aggressive but achievable business plan for growth in what was at the time a fairly sedate retail market.  Seeing CHAMP Ventures and Lorna Jane subsequently pull it off has been equally rewarding.
  3. Do you see anything on the regulatory horizon that will affect the way Australian PE funds do business?
    • Managed Investment Trusts: Prospective legislation regarding new income tax system for MITs, following last year's enactment of legislation allowing the trustee of the MIT to elect capital account treatment for certain investments and the reduction of withholding tax on fund payments to foreign investors.
    • Exposure Draft 202 Leases: Proposed accounting standards changes to eliminate the distinction between operating leases and finance leases and bring most leases from the balance sheet onto the statement of financial position of lessees along with the corresponding lease liability.
    • PPSA: The Personal Properties Securities reform scheduled to take effect from October 2011 will completely overhaul existing schemes for registering security over most types of personal property (aside from real estate).

Off the clock

  1. What is the best deal you have seen written by a PE firm?  
    Snapple: Thomas H. Lee bought Snapple for $135 million in 1992 and sold it two years later to Quaker Oats for an estimated $1.7 billion, reportedly earning $900 million on the investment.
  2. Which person (deceased or alive) would you most like to be on the other side of a deal and why?
    Sir William Deane - Aside from being one of Australia's finest lawyers he is also one its finest citizens and is a worthy role model for any profession.  To work against or alongside him would be an honour.
  3. Which person (deceased or alive) would you least like to be on the other side of a deal and why?
    Judge Judy – ignoring her keen legal analytical mind (which is of itself cause for extra attention), anyone who is not scared of Judge Judy has probably not seen her in full-flight.

News in brief

  • Australia continues to reform its tax and regulatory regime aimed at facilitating investment into Australian private equity, real estate and other funds. See our legal update. 
  • We are proud to announce that Norton Rose Australia is now a sponsor and partner of AVCAL for 2011.
  • Norton Rose Australia has been awarded EOWA Employer of Choice for Women, a prestigious award which recognises organisations with best practice Equal Opportunity programs that recognise and advance their female workforce.

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