At press time, fists were flying over Pacific Equity Partners' broken deal to invest in Flight Centre, the Australian travel company listed in Sydney. Having failed last year to acquire a controlling stake in the business, PEP seemed on the home strait this time around with a plan backed by the board to acquire 30 percent of the company through an innovative structure that would allow existing shareholders to stay in the deal.
Then the wheels came off. An ?evaluation report? from Ernst & Young advised Flight Centre's independent directors that PEP's offer substantially undervalued the company and pointed to potential problems over tax. The board withdrew their support for the transaction, leaving PEP fuming ? though certainly not speechless.
In a published statement, the private equity firm appealed directly to Flight Centre's shareholders, insisting that Ernst & Young's report contained errors and that the company's shares were now trading ?in a misinformed market?. Investors should take a hard look at why and under which circumstances the u-turn happened and challenge the board's decision to scupper the deal. PEP also said it was still willing to continue the negotiations.
Frustrating though it must be for those involved, Flight Centre has become an intriguing story in an already intriguing market for private equity. The past two years have brought extraordinary growth to the Australian buyout industry. With it have come the negative side-effects that successful private equity firms have had to get used to all over the world: media scorn, scrutiny from politicians, threats of regulatory intervention.
Our cover story in this issue charts the industry's rise to prominence and notoriety in a country where the general public until recently had little if any awareness of concepts such as ?buyouts?, ?public-to-privates? and ?carried interest?. We look at how the nature of Australian private equity has changed as a result, and report how local fund managers and limited partners see the future now that their favourite asset class has become front page news.
One increasingly likely scenario ? not just for Australia but private equity generally ? is that the market is about to cool. Global credit markets have tightened, and the cost of funding buyouts is going up. For general partners with unspent equity capital in their funds this is not great news. However, froth coming off a market is rarely entirely without upside. Private equity, in Australia and elsewhere, may be headed for an involuntary break, but in the long-term, a period of regrouping could be healthy. After all, it has been a rather manic period, and a lot of high-profile buyouts have in fact failed to complete. PEP may not be ready to let go of Flight Centre quite yet, possibly with good reason. Before long, however, the Sydney-based firm and its many national and international peers may have time to take stock and reshape their strategies as a new credit cycle begins.
Enjoy the issue,