In line with global trends, we anticipate Australian M&A and investment conditions (both debt and equity) to continue strongly through FY22, driven by steady economic conditions, inter-generational wealth transfer, low interest rates and private equity dry powder. Uncertainty in an upcoming Federal election, potential inflation and rolling lockdowns may temper the current trend and the Foreign Investment Review Board’s (FIRB) post January 2021 expanded regulatory landscape will ensure consultation with all regulatory bodies continues to occur extensively and at the earlier transactional opportunity. Sector specific factors are playing a strong role in some key market sectors contributing to this strong growth in transactional activity.
On the credit side, buoyed by strong availability and relatively low pricing of debt, a number of new credit funds and other non-bank lenders have entered the market. These are deploying debt capital to support growth and consolidation initiatives in a number of sectors not in favour with the major banks. These include tech and services companies as well as industries impacted by the Covid-19 pandemic such as retail and tourism.
Despite the pandemic’s effect on occupancy levels (which has itself resulted in M&A activity arising from the dislocation), the asset class continues to perform strongly, with unabated interest from a plethora of both domestic and overseas investment funds. Childcare, regional shopping centres and industrial and logistics assets continue to drive activity, with macro factors such as interest rates and bond yields remaining a strong influence on investment in A-REITs and the wider sector.
Whilst inflation may affect the attractiveness of yield investments in the longer term, we expect significant continued interest in dedicated real estate funds and possible further industry consolidation such as Centuria’s Primewest acquisition.
Technology and IP
M&A and listings in the TMT sector thrived in FY21 and are expected to continue unabated, throughout the broader market and most notably through Australian successes such as Canva, Go1, Octopus Deploy, Airwallex and AfterPay. In fintech, together with the trend in deferred payment technologies, we expect FY22 to focus strongly on cryptocurrency, blockchain (with targeted local retail regulation continuing to develop) and cybersecurity. The latter has grown substantially over the past four years (between 2017 and 2020, cybersecurity revenue grew by 8% each year. In 2020, Australia spent approximately A$5.6 billion on cybersecurity, with demand expected to reach A$7.6 billion by 2024.
New energy and carbon markets
In common with the global economy, the global redeployment of capital for decarbonisation will continue to create unprecedented opportunities in a currently relatively fledgling domestic market located in a uniquely positioned and resourced landmass. We expect the exponential change witnessed in FY21 to continue, as evidenced by major reforms such as AGL’s proposed demerger, the largest wholesale change to the National Electricity Market (NEM) since its inception and the historically high Australian Carbon Credit (ACCU) price. Domestic funds such as the Clean Energy Finance Corporation and Adamantem Capital will continue to find strong competition for these opportunities from global funds such as KKR, Brookfield, TPG and major corporates.
There remains strong scrutiny following the Royal Commission on the broader sector. Banks continue to divest their wealth and other non-core assets, leading to new specialised entrants taking their place. Holders of Australian Financial Services Licenses (AFSL) are expected to continue to benefit from high demand and barriers to entry (given continued protracted timelines in new AFSL applications), whilst the Australian Securities and Investments Commission (ASIC) has also been particularly active recently in taking regulatory action against AFSL holders for failures to lodge accounts, providing unlicensed advice and operating unlicensed managed funds. ASIC has also been focused on the valuation of illiquid assets in managed funds during the COVID-19 pandemic and issued more stringent guidance around breach reporting by AFSL holders.
Superannuation funds (with assets under management of A$2.7 trillion) continue to play a significant role in both funding domestic private equity funds and making direct investments (predominantly in infrastructure, such as the Telstra towers divestiture and the Sydney Airport bid). Announced increased regulatory scrutiny and mandatory reporting for member funds will continue to create both technology and M&A investment opportunities. Real estate and debt funds also continue to see strong inflows of money from investors seeking a stable income return.