June 2002
Reserve Bank of Australia Bulletin
1
The Private Equity Market
in Australia1
The Australian private equity market has
grown strongly in recent years, driven by
demand for funding from small companies
and restructuring conglomerates, and a rising
supply of funds from institutional investors.
While the market remains small compared to
other corporate financing sources such as the
Australian Stock Exchange (ASX) and bank
lending, it potentially plays an important role
in improving the overall efficiency of business
financing, by providing a source of funding
for smaller and riskier companies which may
have difficulty in raising funds in other capital
markets. This article examines the structure
of the market, and considers factors affecting
the demand for private equity investment and
the supply of funds.
The Definition of Private
Equity
Private equity, also known as venture capital,
is investment outside of public capital markets.
While private equity can be raised from a
variety of sources, such as friends, family
members and business angels, the more visible
(and measurable) avenue is the private equity
market where funds are channelled to
businesses – typically in new or fast-growing
unlisted companies, or companies in financial
difficulty with potential for restructuring – by
fund managers.
Private equity funding in this market can
be broken up into various categories:
i.
start-up financing for a business less than
30 months old where funds are required
to develop the firm’s products;
ii. expansion financing, where additional
funds are required to manufacture and sell
products commercially;
iii. turnaround financing for a company in
financial difficulty; and
iv. management buy-out (MBO) financing,
where a business is purchased by its
management team with the assistance of a
private equity fund.
Businesses tapping the private equity market
often do not have sufficient collateral or a track
record of profits to obtain bank financing. At
the same time, private equity fund investors
reduce the information