Why Rate Hikes Won’t Dent Deals Activity in Australia, According to This Asset Manager

(Bloomberg) -- Rising interest rates won’t derail momentum for record Australian merger and acquisition activity as pension funds continue to hunt for deals, according to Revolution Asset Management. 

Despite market pricing for multiple rate hikes by the Reserve Bank of Australia this year, borrowing costs will remain historically very low in absolute terms, said Lucie Bielczykova, an associate portfolio manager at Revolution, a manager of private debt. And with Australia’s pension funds ramping up involvement in deal making, it only adds to the amount of cash hunting assets, she said. 

“We expect another strong year in 2022 despite the downside risks in the system,” Bielczykova said on Bloomberg TV Wednesday. “While there is some risk from rising inflation and illiquidity, we think the amount of capital out there and the continued cheap funding will support volumes.”  

M&A activity hit a record last year, driven by Australia’s pension funds -- which manage A$3.4 trillion in assets -- that snapped up everything from cell-phone towers to pubs and toll roads. With many investors questioning elevated stock valuations and bonds having negative real yields, many of these firms are turning to private markets for better returns.

Potential deals are already showing up two weeks into the new year. Singapore Telecommunications Ltd. is mulling options including a potential stake sale of its Australian fiber optic cables, while Asian insurance giant AIA Group Ltd. is considering selling some life insurance legacy assets in Australia to Resolution Life. 

Opening Up 

Activity may also find support during the re-opening of Australia’s international border as the year progresses, allowing in more offshore investors that don’t have a local presence, Bielczykova said. Their participation in deals fell last year, as domestic pension funds and private equity firms that already have an established Australian presence took up the baton, she said. 

“We can’t underestimate the power of being here on the ground and doing the due diligence” on deals, she said. “So with international borders reopening, we definitely see that being a further support for volumes into 2022, on top of what we already have.” 

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