Study: Australia's PE industry revenues to slow(3)

Management fee revenues in Australia are facing headwinds as other asset classes become attractive and private equity uses less leverage on deals.

Management fee revenue for private equity firms in Australia is forecast to increase 7.4 percent to reach $303.3 million this year, resulting in a 1.5 percent annualised revenue growth rate for the period 2007-2012, according to a report by IBISWorld.  

However, the growth is not expected to continue, and during the next five-year period, 2012-2017, industry revenue is expected to increase by an annualised rate of only 0.3 percent, the report said.

One constraint is the competition from other investment classes. Anticipation of a stock market recovery and an interest rate hike may cause an increase of capital into investment alternatives such as stocks and lower-risk fixed interest investments at the expense of allocations to private equity, the report said.

Another limiting factor is the uncertainty surrounding tax on private equity sales, which may discourage foreign investment in private equity. It remains unclear whether a foreign firm’s proceeds from the sale of an Australian company should be treated as non-taxable capital gains or as taxable income.

Private equity firms are also using less leverage on deals following the financial crisis, the reported noted. The increase in the non-debt component could potentially reduce the return from such deals and lead to a drop in profit and investor interest.

“The global financial crisis put an end to the cheap credit conditions and consistently rising asset prices, resulting in substantially reduced private equity activity,” IBISWorld industry analyst Ee Jen Lee said in a statement.