Improved DPI to unlock fundraising
Continuing a theme from last year, focus in 2025 will remain on PE sponsors resolving the DPI deficit (distributions to paid in capital, or in other words, the ratio of cash paid back to limited partners as compared to capital invested). The pressure to improve DPI and expedite exits is now playing into fundraising timetables.
Sponsors are looking to return to market this year with flagship fundraisings after a slower period of fundraising over the past two years, and successful reups amongst existing limited partners will be linked to improved DPI, which in turn will drive exit activity from existing funds. This is set in the backdrop of tailwinds moving in private equity's favour – equity markets are looking overvalued, institutional allocations to private equity are improving, the interest rate cycle is moving in the right direction, and the market for exits is being supported by favourable conditions in credit markets.
What do we expect to see in 2025?
- Continued momentum in deployment in continuation fund technology amongst the PE community in Australia (whether they be single asset or multi-asset continuation vehicles which bring scale), as an important part of the toolkit of exit options.
- Reopening of the LP-led secondaries market: while LP-led secondaries in the infrastructure and private credit sectors were active in 2024, discounts to NAV are now narrowing in the PE secondaries market, bringing superannuation and other institutional investors back to the table to run processes to effect portfolio clean-ups and manage the denominator effect driven by lower DPI.
- General partner stake transactions: globally, we have seen significant growth over the past 18 months in investor interest in taking GP stakes. Domestic PE sponsors may seek to deploy the technology to finance growth initiatives, replenish funding sources for GP commitments and as a means of dealing with succession, as the platforms continue to grow and expand to cover additional strategies (such as private credit).
- Evergreen funds: access to high net worth investors and wealth platforms (and in some cases, retail money) continues to drive product innovation, as product distributors and sponsors innovate in offering semi-liquidity in fund terms. Of relevance is the recently-concluded parliamentary inquiry into the wholesale investor tests, which has recommended against an increase in a range of thresholds (including asset and income thresholds) used to determine wholesale client status but has supported an overhaul of the sophisticated investor limb to shift it onto more objective criteria, which should serve to provide additional certainty as to the future of the wholesale / retail client distinction for those sponsors targeting individual investors.
A spotlight on PE opportunities in health technology
Australia is facing into the challenges of an ageing population and the burden of chronic disease with a healthcare system struggling to contain escalating costs. The intersection of rapid technological advancements and the demand for more efficient healthcare solutions creates a wealth of opportunities for PE investment in health technology.
Investment focus in 2025
In 2025, the spotlight will be on investing in health services and technologies that have potential to slash inefficiencies and waste in the healthcare system as well as technologies that can unlock new models of healthcare delivery.
There is also considerable room for consolidation and restructuring of traditional models of providing healthcare services in a highly fragmented and unstructured market to more efficient, streamlined service delivery.
AI applications gaining momentum
AI has been widely used in healthcare for some time – radiology and biotechnology have been clear leaders in its adoption. 2025 is set to witness how much present excitement about AI uses converts into new practical applications in healthcare.
AI tools leveraging digitisation, facilitating task automation and assisting administrative workflow are becoming trusted staples among healthcare professionals. This growing trust paves the way for a new wave of investment in more complex (and higher risk) regulated applications, across drug discovery and safety, clinical decision support and diagnostic tools. AI offers huge potential upside - larger healthcare organisations are increasingly likely to adopt these tools, but health funding challenges and regulatory barriers can often slow adoption.
Asset-light is attractive
Healthcare services are currently highly fragmented, presenting some opportunities to drive cost efficiencies and streamline services through carve-outs, consolidation and technology application. However, asset-heavy companies involved in more traditional health service delivery are becoming less attractive to sponsors – HealthTech/MedTech companies tend to be asset-light and provide a different sandbox to play in.
Beyond this, healthcare providers will continue to rely on IT infrastructure to find operating efficiencies: key areas for investment include clinical trial and IT services infrastructure, data analytics, and image analysis/reporting tools.
Evolving healthcare delivery models
Innovative service delivery in health has taken a path through digital platforms, telehealth and increasing reliance on remote monitoring. These innovations all bring the potential to ease the burden on traditional healthcare systems. These developments can be leveraged to respond to the shift towards patient-focused and personalised healthcare, powered by scalable technology solutions in areas such as mental health and long-term care. We'll be keeping a close eye on any changes in subsidised access to health technologies such as medicines, vaccines, medical devices and health services coming out of the review of Australia's health technology assessment policies and methods.
Outlook for the healthcare sector in 2025
Despite some regulatory and political uncertainties, 2025 is expected to see a relentless drive to adopt technology across the healthcare sector. PE is well positioned to capitalise on this trend as a funder of healthcare innovation, targeting advancements in health technology that can best address evolving needs across the healthcare system.
A watching brief on proposed amendments to the foreign resident CGT regime
Generally speaking, foreign residents can disregard a capital gain or loss from a capital gains tax (CGT) asset, unless that asset is a direct or indirect interest in 'taxable Australian real property' (or 'TARP'). There has been some uncertainty regarding the precise scope of this exception, especially in sectors like renewables, energy and resources, and infrastructure. Complexities can arise, for example, when foreign investors dispose of shares in an Australian entity that lacks an ownership interest in land (ie 'real property rights' in the strict sense), yet owns assets that with a close economic connection to the land (eg wind farm turbines that are affixed to the land).
On 14 May 2024 the Federal Government announced its intention to narrow the circumstances in which a foreign resident can disregard a capital gain. On 23 July 2024, Treasury issued a consultation paper outlining several examples of assets that have a 'close economic connection to Australian land and/or natural resources' and which would accordingly be included in the foreign resident CGT base. These assets include:
- leases or licenses to use land situated in Australia (including pastoral leases);
- water rights in relation to land situated in Australia;
- infrastructure and machinery installed on land situated in Australia (including wind farm turbines, telecommunication towers, and transport infrastructure);
- options or rights to acquire the above assets; and
- a non-portfolio membership interest in an entity where more than 50% of the underlying entity's market value is derived from the above assets.
Treasury has indicated that, if enacted, these amendments will apply to CGT events commencing on or after 1 July 2025. Alongside these amendments, Treasury has also proposed amending the point-in-time principal asset test (or PAT) to a 365 day period; and also requiring foreign residents who dispose of shares or other membership interests exceeding $20 million in value to notify the Australian Tax Office.
At the time of writing, however, Treasury has not provided feedback on the consultation process and draft legislation has not been released.