2023 could be vintage year for private equity, says Tanarra Capital CIO Matthew Brown

Private equity fund raising for 2023 is shaping up as a good vintage for investor returns, according to Tanarra chief investment officer Matthew Brown.

It is all about timing. By 2024 when these funds are ready to deploy, he expects valuations to be much more attractive as the expectations around private equity assets slowly adjust to higher interest rates.

Equally, alternative asset firm Tanarra is fielding an increasing number of approaches for help from stressed businesses as rate rises bite.

Almost a year ago Tanarra CEO and founder John Wylie announced Matthew Brown as his new point man, a former RAAF fighter pilot who went on to spend many years working for Stockdale Street, part of the Oppenheimer family fund based in London.

In that time Tanarra has grown from $2.6bn to $3bn, with five direct investment strategies: public and private equity, venture capital, private performing credit and private distressed credit.

As floating rates rise Tanarra’s private performing credit is lifting return prospects, but the distress market is also warming up.

Brown says in Australia strict lending standards have left the major banks in pretty good stead but beyond the banks distress has risen, albeit still below the levels before Covid hit and stimulus arrived. The trend, however, is towards tougher conditions.

“Over the last three months the number of companies we see in the stressed camp rather than distressed, coming inbound to us and calling ahead for capital solutions to our Tanarra Restructuring Partners Fund, have had a significant uptick,” says Brown.

“It is companies which have complicated balance sheets or are slightly overleveraged, or potentially have slightly lower quality business models coming to us in the first instances, but it is those early signs of potentially what is to come.”

Typically these businesses are privately owned assets. Ever expanding multiples are a thing of the past as the game returns to value creation through good old blood and sweat – revenue growth, operating margin improvement and building value over time.

It all makes the private market for PE rather more interesting. But on timing, Matthew Brown thinks the bottom is actually about 12 to 18 months away.

“Capital raised in 2023 PE fund vintages will end up being a really good vintage because they will be deploying into that,” he says.

“The problem with private valuations at the moment relative to public is that private vendors are not willing to lower their expectations on sale prices just yet.”

This is evident across the board, he says, from the private housing market all the way up into private companies.

“But the longer we stay in this depressed valuation environment, the more those private valuations will converge to what you are seeing in the public market,” he says.

Tanarra has just anchored its PE Fund 2 with $100m and has plans for a $500m raise in 2023.

In both the US and Australia Matthew Brown sees risk to the downside with markets too bullish about the US Federal Reserve’s recent slowdown in interest rate hikes.

Looking both from a “bottom up” perspective across Tanarra’s portfolio companies and from others he speaks to, he says firms are opportunistically taking price increases.

“The real risk is that it creates some inertia with inflation, it does not drop as quickly as the market is pricing in and then both the Federal Reserve and the RBA have to overtighten which would cause another correction,” he says.

In Europe and China, from a bottom up valuation perspective, asset prices are much cheaper, although Brown acknowledges the geopolitical risk in China.

He gauges the Australian public equity market to be around fair value with opportunities both idiosyncratic and stock specific. It means the source of outperformance will be through adding value to a business over a five to 10-year time frame. In pushing to add value, Tanarra has pioneered its “respectful activism” as an investor in businesses like Boral and Lendlease.

On Treasurer Jim Chalmers’ much talked about values-based capitalism, Matthew Brown sees little impact in 2023 but a definite trend to ponder over the next decade – both for investors and customers.

“Businesses that are creating harm to the world ultimately are less sustainable than ones that are neutral or positive over time in terms of sustainability and that feeds one’s view on the business quality over time. It has a real impact on the sustainability of earnings over the long term,” he says.

Tanarra is a big believer in the need for a liquid long-term credit market for Australia companies to tap at reasonable rates. John Wylie describes its absence in Australia as “frankly a national disgrace” given the size and strength of the country’s superannuation system.

Brown agrees it is a shame Australian companies still have to seek their long-term debt needs in the US.

“As shareholders, we’d like those public companies to have rational capital structures that can help them make very long term decisions. When you have big shocks like Covid-19, having a debt stack with a short-term maturity puts lot of pressure to make shorter-term decisions around liquidity. Tanarra has the ambition to help create that market and make it a reality,” he says.

Tanarra’s other new play is in venture capital with Tin Alley Ventures. Funds will be deployed over the next three to five years in Australian biotech and healthcare.

Tin Alley recently hit first close with over $100m with expectations to double that by final close in mid-2023. The aim is to repeat what Tanarra has done at Oxford University and at the University of Melbourne through investing in commercialising IP and innovation.

Brown says Melbourne’s competitive advantage with its ecosystem of research institutions, and some attractive tax breaks on R&D for biotech research, biotech and healthcare offers another theme for the next decade.