Sustainability reporting to ‘heavily impact PE deals this year’
Australia’s private equity market will continue to attract foreign investment this financial year but ESG will be a major factor influencing deals, BDO predicts.
Australia is well-positioned to continue growing its status as a highly attract private equity (PE) market on the global stage, according to mid-tier firm BDO.
Favourable conditions including a stable political and economic environment, robust regulatory frameworks and a highly skilled workforce have made Australia’s PE market are highly attractive region, BDO partner Sebastian Stevens said in a recent article.
Australia also offers a variety of investment opportunities across key industries such as finance, technology, healthcare, mining and energy and is also the gateway to the Asia-Pacific, one of the fastest-growing regions in the world.
“Since the 2019 financial year, Australian PE deals have shifted towards higher levels of inbound activity,” said BDO.
“Preqin data indicates circa 58 per cent of Australian PE deals across FY22 and FY23 involved foreign PE acquirers/investors, up from circa 48 per cent during FY19 to FY21.”
Australia’s PE market will continue its strong growth despite global macroeconomic headwinds in the short to medium-term.
“Australia is primed for increased foreign investment given its favourable market conditions, and investor focus on diversification across geographies, asset classes, and sectors,” the mid-tier firm said.
ESG a major factor for successful deals
Environmental, social and governance (ESG) risk factors and policies are now a much greater focus in PE deals with fund managers incorporating ESG factors into their valuation methodology, due diligence process, and warranties and indemnities negotiations.
“This is largely driven by investor mandates and the introduction of new reporting requisites around the world,” said BDO.
“Recent surveys have highlighted that more than 80 per cent of fund managers and general partners did not progress with an investment opportunity due to ESG-related concerns. This is driven by the view that ESG risk is a leading indicator for broader business risks.”
The failure to comply with ESG requirements can adversely impact talent retention, brand reputation, and marketplace acceptance.
“There are also financial, compliance and reporting risks given the introduction of new standards from the International Sustainability Standards Board (ISSB 1 and ISSB 2),” the BDO article said.
“These standards are likely to apply to ASX200 and APRA regulated companies in 2024, before expanding to other reporting entities by 2028.”
BDO said ESG and sustainability reporting requisites will heavily impact the likelihood of completing a successful deal.
“We anticipate PE funds to continue devoting greater resources to meeting ESG standards and compliance, and their investment committees will continue to demand the integration of ESG into their investment theses,” the firm said.
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