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“A ‘perfect storm’ for M&A may not lead to 2022 crash”: Alvia Asset Partners’ Chris Scarpato talks to ausbiz

Currently there are record high levels of M&A activity globally (surpassing previous highs recorded in 2007 in the lead up to the GFC) driven by a perfect storm of record low interest rates and swathes of cash across financial and strategic buyers, including private equity firms, super funds and corporates. Australia has not been immune from this wave of corporate activity and is on track to achieve its biggest year of deals since 2007.

But how sustainable is this level of corporate activity? And when should we expect it to come to an end? Chris Scarpato explains why he feels there’s still more to come, when he talks to ausbiz’s Annette Beacher.

 

TRANSCRIPT

Annette Beacher
And now let’s talk to cashed up companies and M & A. Our guest says the whole global trend is driven by a perfect storm, and we are in the middle of it. We have had a run of deals, the highest since 2007. So what does this mean? Is it all over? Let’s ask Chris Scarpato, Alvia Asset Partners. Oh, we always worry when we start reaching records before the GFC, try and calm our investor nerves.

Chris Scarpato
Morning, Annette. Thank you for having me. I think, to your point around the perfect storm, similar to what Wes was saying just before, you’ve got record low interest rates, which are driving asset prices to record highs. You’ve got monetary stimulus from central banks and governments. And then you’ve got companies that are actually doing really well. You’ve got record corporate profits. You’ve got really strong balance sheets, and company have got plenty of cash and access to really cheap debt financing. And then the final two things. You’ve got private equity firms that have raised records amounts of money that they haven’t deployed yet. And then the final point, you’ve got super funds, in particular, the large super funds here in Australia, that are sitting on billions of dollars they need to invest in the markets.

Annette Beacher
We get nervous about records, but also names like Sydney Airport, as you say, with super funds, given the super funds are sitting on trillions of dollars, isn’t that a great way to ensure long-term returns for its trustees?

Chris Scarpato
Yes, Annette, exactly right. These sort of assets, like Sydney Airport, which we’ve held here at Alvia for quite some time, are really rare unique assets and the consortium, that’s bought Sydney Airport, or that’s in the process of buying it, has been opportunistic to an extent. But they’ve got millions of super fund members who they need to generate a return for. And we’re sort of at the point where cash and fixed income is becoming quite a restrictive asset class for these funds. So that’s why we’re seeing this massive push into the structure assets such as the country’s largest airport. And we’re seeing these super funds partnering with infrastructure partners and instructure funds to invest in these sorts of assets.

Annette Beacher
Now, of course, we’ll just talk about Sydney Airport, which is the infrastructure space. How about, for example, Afterpay. So there’s lots of sectors caught up in this wave.

Chris Scarpato
Yeah, that’s right Annette. You’ve got Afterpay and Square, that would have been the largest merger in Australia’s history, sort of around $40 billion. Albeit it’s all shares changing hands, there’s no actual cash changing hands. But, this year, apparently in the first nine months of the year, our M&A activity is six times more than what it was last year. And in 2007, we only hit $139,000,000,000 in transactions, this year we’re already at $330,000,000,000. So you’re seeing activity across a number of different sectors. You’re seeing private equity firms, you’re seeing companies buying other companies in the sector.

Chris Scarpato
It’s really indiscriminate. And it’s really just following that international trend, obviously led by the US and parts of Europe. It’s across all sectors. It’s well above what we saw in 2007. And just the size of the transactions, especially for Australia, is well beyond what we saw in 2007 and since that time.

Annette Beacher
It’s probably hard to put, like, a number on it. But as we know, internal funds buying each other or we’ve got external. Is there any mix about international interests versus domestic M&A?

Chris Scarpato
It’s a good question. Obviously the biggest deal being Afterpay actually being from a large US business, and then you look at Sydney Airport and I guess because of the foreign ownership caps you’ve seen mainly an Australian consortium bid there. But there’s definitely a mix. Another business that we own in Australia, it’s a little on the smaller side is in salary packaging business, Smartgroup. That actually saw an offer from a US private equity firm partnering with an Aussie firm. So you are seeing some of that, a lot of those sort of partnerships happening with that M&A activity. And then you’ve also got an Australia super fund that’s joining those two firms. So you’re definitely seeing you’re seeing crossborder cooperation or collaboration in those deals. And then you’re also see super funds joining those more financial buyers in that bidding process as well.

Annette Beacher
And, of course, I have to ask, everyone loves the upside. Will this slowly fizzle out or will something go pop?

Chris Scarpato
It’s a million dollar question Annette. Conditions are pretty good for this to continue. It’s always one of those things. It can change when you least expect it.

Chris Scarpato
I think the biggest thing is if you see, similar to what Wes was saying in the agriculture space, with record-low interest rates, a lack of return alternatives outside of fixed income and cash, and the fact that these super funds, particularly in Australia, are getting so big that they need to do these sort of take private deals to turn the dial – I think unless you see rates start to go up and even a turning in market sentiment, I think that will be (similar to what happenned in the 07/08). You saw a really big change in sentiment that really stopped all that activity in its tracks.

Chris Scarpato
You sort of need a big event like that that will really cause things to unravel. It’s a matter of when, not if, that happens, I imagine you will see that activity start to dissipate.

Annette Beacher
Yes. Let’s hope dissipate and not crash, obviously. Thank you so much, Chris, for joining us today.

Chris Scarpato
Thanks Annette for having me.

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