News & Insights

Regional Spotlight: Enhanced Due Diligence & Riding the Wave of Growing Australian Business

In 2022, business activity in Australia far surpassed projections for the year. An October survey from National Australia Bank Ltd (NAB) showed its index of business conditions climbed 3 points to +25 in September, far above its long-run average.

Firms are actively looking at M&A opportunities while the business deals amongst and with Australian businesses are surging ahead. However, with the increase in business in this revitalized post-Covid market comes some new risks and threats that call for enhanced due diligence that goes beyond basic checks. Let’s take a closer look at the increasing business activity in Australia and the risks companies need to be aware of as they navigate this market.

Rising Business Conditions in Australia

According to the October NAB survey, Australia’s overall business activity has been increasing steadily:

  • NAB’s measure of sales stood at +31, far above pre-pandemic levels
  • Firms were still running flat out, with capacity utilization just off a record high at 85.8 percent
  • Profitability held steady at a healthy +22

Travel is back

Spots 1-3, 5, and 9 of the top fastest-growing industries in Australia are related to travel: Inbound Tour Operators, Travel Agency and Tour Arrangement Services, Online Travel Bookings, International Airlines, and Airport Operations.

Mergers and acquisitions are on the rise

In Australia, deal value for mid-market M&A climbed by 39 percent in 2021, while deal volume increased by 20 percent. Technology, media and telecommunications, and energy, mining, and utilities are the top industries undergoing M&As in Australia. In addition, supply chain interruptions during the pandemic made many companies attempt to take their supply chain destinies into their own hands by acquiring relevant vendors.

Relatively low risk business environment

In addition, Australia risk assessments are showing low-risk standings for business activity:

  • Australia’s Country Risk Rating is currently A3, sitting comfortably between Low Risk and Acceptable Risk for corporate payment behavior
  • Australia’s Business Climate Rating is currently A1, showing Very Low Risk for debt collection, institutional quality, and intercompany transactions
  •  Australia’s Transparency International Corruption Perceptions Index in January 2022 dropped to 18 from 11 the year previously

From 2021 to 2022, Australian exports increased by 19.8 percent, and Australian imports increased by 43.9 percent, with China somewhat surprisingly remaining the leading trading partner, despite numerous geopolitical and trade issues over the past 18 months.

Notwithstanding an overall positive outlook on business in Australia — and essentially a secure business environment — there are nonetheless some challenges worth noting for businesses engaging in expanded business activity in this jurisdiction.

Risks Amid Australian Business Growth

Growing international exposure  

The growth of Australian business activity is particularly focused on the IT sector. Seventy-two percent of Australian IT companies indicated their organization is planning to expand into new markets across Southeast Asia over the next 12 months. At the same time, major US tech companies are expanding into Australia to open further doors into Asia, as the country continues to expand its influence in the region. Melbourne and Sydney are the primary recipients of this investment.

Entering any market requires businesses to conduct in-depth due diligence to understand both the regulatory environment and business partners. Australia has one of Asia’s most mature regulatory frameworks, but that does not preclude businesses from taking necessary measures to ensure their investments are secure.

M&A risks

As with any M&A activity, the companies need to ensure they are fully clear on who they are partnering/merging with. Checks on the target partner’s business ethics, ESG, key staff, and ultimately its beneficial ownership are all important considerations.

Numerous individual sectors carry their own varying degrees of risk that companies interested in conducting business in Australia will need to navigate. As discussed above, Australia’s technology sector has been a recent hotbed for M&A activity. In fact, the deal struck between Block, Inc. (formerly known as Square, Inc.) and Afterpay was one of the country’s largest successful public M&A deals in FY22. However, though the sector has proven to be profitable and has piqued the interest of investors around the globe, tech-based deals in Australia do not come without their fair share of risk.

For example, major crypto players Superhero and Swyftx recently announced walking away from a $1.5 billion merger. The decision came amid a regulatory crackdown on cryptocurrency firms. With nerves swirling around crypto and regulators being especially vigilant, the companies thought it best to hold off on the merger without all of the proper crypto compliance and due diligence initiatives in place.

Shifting ESG reporting requirements

In Australia, many companies are making the changes necessary to maintain International Sustainability Standards Board (ISSB) requirements, but according to PwC, the standards are only getting stricter. When considering Australian business investments, it’s essential to understand the larger picture of sustainability and ESG reporting requirements and where your prospective partners or investment targets stand on these important issues.

For example, Australia has seen a 13 percent increase in companies disclosing a Net Zero carbon commitment. However, only 55 percent of those companies have incorporated a discussion of their transition plan to carbon neutrality. Just because a company reports positive ESG initiatives doesn’t mean it will stand by its commitments long-term, resulting in negative impacts for any international partners.

The primary Australian ESG reporting challenges to be aware of include:

  • Financial quantification: Estimating the potential future financial impact on a specific asset under evolving scenarios carries risk and creates disclosure gaps.
  • Skills shortage: Finding people with the right skills in sustainability performance and reporting amid a labor market shortage is a challenge.
  • Data quality and process management: It can be difficult to gather and validate the data needed to comply with ISSB standards and assess the financial impact on assets and business operations.

Expanding private equity activity & geopolitical tensions

Australia’s boom in business growth has been helped along by increased presence of private equity investors. In a time of mounting geopolitical tensions, Australia has become an increasingly appealing area for global investors due to its economic, political, and regulatory stability, lower rates of competition, and ample activity in attractive sectors, including technology, healthcare, and infrastructure. In fact, MinterEllison’s 2022 Private Capital Report revealed that 42 percent of private capital dealmakers indicated that Australia was a top market of interest when looking for Asia Pacific opportunities. This data matches with trends of offshore PE funds taking over the investment space in Australia. According to Norton Rose Fulbright, in past years, “the vast majority of PE deals were by Australian managers investing Australian institutional money.” However, more recently, this has shifted; by 2019, approximately 60-70 percent of all PE funds in Australia came from offshore sources. Additionally, major private equity firms, including KKR, Blackstone, and TPG Capital, have been key players in large M&A deals over the past two years.

Australia’s History of stability and distance from several geopolitical events, such as Russia’s invasion of Ukraine and the resulting energy crisis, has continued to further the appeal for foreign PE investors. However, Australia does have closer proximity to issues arising in China and other countries in the Asia Pacific region, and geopolitical risks such as these cannot be considered in a vacuum. As with any region, there are opportunities for geopolitical events — and their accompanying risks — to rapidly escalate and disrupt the Australian market through a “domino effect.” KPMG has proposed three major risk cluster scenarios that will create new business challenges not only for native businesses, but also foreign PE investors who may lack familiarity with the region and evolving regulations. The three major risk scenarios identified by KPMG are:

  • Increased public skepticism and scrutiny of business
  • Economics and politics collide in the region
  • Inability to adapt to an evolving region

Despite Australia being viewed as a stable region rife with opportunity, investors will need to remain vigilant and be able to quickly adapt their due diligence and research processes to ensure profitable and secure transactions. Insufficient diligence can not only create turbulent waves in private equity investments, but also result in suboptimal deal performance.

Enhance Your Australian Business Due Diligence

Increased Australian business activity from around the world makes it very challenging for companies to monitor every partner and third-party vendor risk. With the right enhanced due diligence solution in place, companies with any business involvement in Australia can stay ahead of potential risks. Ready to learn more about how to protect your business in Australia? Contact the due diligence experts at IntegrityRisk.