Half the price of Healthscope

30 years ago, private equity was uncrowded, and less competition meant better deals. Intense competition today means higher valuations, leading to a lower margin of safety. Adrian Warner, Managing Director and CIO of Avenir Capital argues here that public equity markets now offer better pricing opportunities.

Adrian has pedigree in private equity so offers a unique perspective. In this video, with transcript, he tells us that: “There's something like $1.7 billion of dry powder in the private equity industry at the moment. The average purchase price in private equity deals is about 11 times EBITDA, which is the highest it's ever been”.

In this short video he tells us about a quality hospital operator he invested in at half the valuation of Healthscope. Read on for the full story.

Edited transcript

“I'm a big fan of the private equity industry and I've spent a long time in it, but one of the big issues is it's been so successful there's been a huge flood of capital. And as always, returns attract capital, and capital destroys returns.

And I think there's a danger if participants are not careful that that's the trend that we're on. There's something like $1.7 billion of dry powder in the private equity industry at the moment. The average purchase price in private equity deals is about 11 times EBITDA, which is the highest it's ever been. Debt levels being used are about 6 times and higher, which is again amongst the highest it's ever been.

The financing that's being used is referred to as covenant light, so there's very little borrower protection in the deals that are being done. Which is great for the private equity guys… but very bad for providers of credit to private equity deals.

So I think the industry is a powerful industry but it's starting from a position of an unattractive investment backdrop: High prices, high multiples, high debt levels, and a huge amount of capital.

And I think there's opportunity for us, and what we try to do is apply a private equity mindset to the public markets. 

We like being very fundamentally oriented, we like concentrated portfolios, we like investing with a long term time frame, and not focusing on short term performance versus a benchmark. 

So there's elements of the private equity model we really like. But I think in the public market, with the immense volatility you get, there's much greater opportunity to buy very high quality businesses very attractively. 

We bought a company called HCA, which is the leading hospital operator in the US about this time last year, and it was about 7 times EBITDA. 

It is a very strong company with a very attractive industry structure, dominant in its markets, 2 and a half times bigger than it's nearest competitor, 25% average market share in its local markets, and making EBITDA margins 8 percentage points higher than its nearest competitors. It’s very well run with a very economically aligned management team, aggressively buying back shares, and very, very high quality capital allocation being carried out by the management team. We bought all of that at about 7 times EBITDA. 

In contrast, some of my old private equity colleagues are trying to buy the number-2 hospital player in the Australian market, Healthscope, at about 14 times EBITDA. It's a public company, they've got to convince existing shareholders to sell. They're now back for a second attempt. The first time around a large Canadian infrastructure player came in to play, so this competition makes it very hard to buy businesses and buy assets at attractive price in the private equity world at the moment. 

And paradoxically, unlike 30 years ago, the public equity market offers much more attractive pricing opportunities to us than the private equity world”.

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Avenir Capital is an Australian based investment manager, specialising in value-oriented global equity investments. Find out more here