How the wealthy are rewriting private capital investing rules

A major transition is underway from “broken” buyout models towards growth capital with lower deal sizes and longer terms.

Ultra-high-net-worth family offices’ growing domination of private capital markets is increasingly “changing the rules” on investing from traditional leveraged buyout strategies to longer-term capital growth, according to sector specialists.

Private capital investors have increased four-fold to 40 per cent since 2020 as super funds declined from nearly half to 13 per cent, possibly because of super fund consolidation, according to analysis by Preqin, which provides data for the alternative assets industry.

KPMG partner Robyn Langsford (pictured) says: “There is a sparsity of investment opportunities for big private capital in Australia due to market size and the level of private capital available.

“As a result, private capital is changing the rules to suit opportunities in Australia, which means shifting away from buyout fund models more towards growth capital models with lower deal sizes and longer terms.”

Jono Gourlay, head of wealth for Mutual Trust, the nation’s largest multi-family office consultancy, says: “Private capital investing is an increasingly attractive asset class, with more family offices allocating to a range of private market and alternative investments.”

Private capital includes all forms of capital – equity and debt – provided privately and not through public markets. It includes private equity and credit, venture capital, real asset and private placements.

The recent Capgemini World Wealth Report reported Australia’s proportion of high-net-worth individuals rose by about eight per cent in 2023, which compares to a global increase of about five per cent. Australian family offices are estimated to have about $500 billion under management.

Growth funding typically targets minority investments in expanding companies. It is described as “patient” capital because it focuses on accelerating growth using lower leverage and lowering risk. By contrast, buyouts seek a majority or full acquisition of a mature company, targeting operational efficiency and debt structuring.

Langsford says: “The more generic buyout fund models are ‘broken’, private capital is pivoting to growth capital experiments and projects in order to be able to keep deploying capital and generating a return for investors.”

The Federal Government also believes private capital has a critical role to play in plugging a $38 billion growth funding gap needed by businesses with revenues between $2 million and $100 million.

Its $540 million Australian Business Growth Fund is intended to demonstrate to investors there is a commercially viable way to provide long-term, “patient” capital to growth businesses.

The sector accounts for about six per cent of all companies but more than  42 per cent of employment, around 25 per cent of total economic output and  nearly 50 per cent of all research and development.

Fund managers, such as Quadrant Private Equity, one of the nation’s leading private equity firms that has raised more than $6 billion, and TPG Capital, a global manager with around $343 billion, offer products targeting exposure to the sector.

Mutual Trust’s Gourlay adds: “There is a growing trend of family offices allocating capital to growth funds in private markets, such as private equity and venture capital.”

He says the trend is being influenced by factors ranging from improved access to private market investments through to a growing pool of less researched companies for sourcing opportunities.