PE Pulse: global uncertainty to provide opportunities in Australia

Amid global uncertainty, Australia continues to shine as a stable and attractive destination for private capital investment. With geopolitical tensions and economic challenges impacting markets worldwide, Australia’s trusted institutions, growing population, and services-led economy offer a compelling proposition. However, rising interest rates, regulatory changes, and evolving market dynamics present both challenges and opportunities for private equity players. In this edition of PE Pulse, Clayton Utz's private equity team explores the trends shaping the sector, highlighting strategies for navigating risks and capitalising on opportunities in the year ahead.

Amid geopolitical risk, Australia remains a safe haven for capital

Australia is a safe haven for private capital. With crises and uncertainty across the northern hemisphere, we see the Australian market as being an increasingly central plank of investment strategy. Stable government, trusted institutions, and a sophisticated services-led economy with growing population are hard to resist. However, it is difficult to ignore what is happening across the Northern Hemisphere with wars in Europe and in the Middle East and the consequences for global markets including Australia. Australia was an outlier last year where interest rates began to rise in the second half. The war in the Middle East will affect the cost and reliability of fuel. This, in turn, is likely to drive inflation and impact interest rates. Interest rates in Australia are likely to continue to trend upward in the short to medium term. This means debt will be more expensive in this market. That being said, opportunities present and the fundamental premise that Australia remains a stable investment destination for capital remains true. As a result, we think there will be continued foreign investment in the market, driven by the private capital firms. With $1.3tr in global dry powder available to be deployed (leaving aside co-investment capacity) there is capital available for the right investments. We remain optimistic for the year ahead albeit there are headwinds.

Regulatory spotlight on the ACCC

The two main M&A regulators relevant to private equity investment in Australia are the Foreign Investment Review Board (FIRB) and the Australian Competition and Consumer Commission (ACCC). Funds are familiar with FIRB. We have seen a quickening in the processing of FIRB approvals save for those "sensitive sectors", eg. critical minerals, critical infrastructure, etc, where the process does take longer.

From 1 January 2026, Australia has implemented a mandatory and suspensory merger control regime, fundamentally altering the landscape for private equity transactions. Transactions closed without required approval are automatically void, with potential penalties for non-compliance. Filings must be made where thresholds are met regardless of whether any competition concern arises, and filings under a threshold should still be made where competition issues or concerns arise.

This new regime impacts domestic transactions and transactions where Australia may be a relatively small part of a global transaction or merger. Strategic deal planning is now critical to address ACCC regulatory risks, particularly given the documentation required for filings and the need to factor pre-notification periods into transaction timelines.

The ACCC’s review process after it accepts a filing includes a Phase 1 decision within 30 business days (or 15 business days on a fast track) and a Phase 2 review that can take up to a further 90 business days – both subject to clock-stoppers. Waiver notifications can also be obtained within 25 business days for simple transactions which do not raise competition issues. PE funds must carefully navigate these timelines, especially for transactions involving local area analysis or remedies, as the ACCC does not provide exemption certificates akin to FIRB for lower-risk investments. As such, careful consideration should be given to investments where the thesis encompasses a strategy of successive bolt on acquisitions.

The new regime extends to minority investments that confer material influence over a target’s competitive conduct, such as governance rights, veto powers, or access to sensitive information. Funds (including Limited Partners (LPs)) must assess co-investments, consortium deals, and sub-majority stakes to determine notification requirements. Additionally, determining filing obligations can be complex for funds with Australian revenues recorded in connected entities, underscoring the importance of maintaining an up-to-date register of revenues. Even where ACCC filings are not required, FIRB forms now include detailed competition-related. PE funds should ensure that filing exceptions are clearly outlined in FIRB forms and remain vigilant about the interplay between FIRB and ACCC processes.

As noted above, transactions completed without required ACCC approval are automatically void, posing substantial challenges during exit, including potential disputes, compromised title, and diminished investment value. We see due diligence by buyers on competition matters being a key item on M&A transactions going forward.

What does this all mean? Two key things. First, transactions are likely to take longer to complete. Secondly, where funds in Australia did not qualify as "foreign" for FIRB purposes and thus may have circumvented the need for FIRB filings, the competitive advantage over "foreign" funds is diminished given the ACCC regime will apply to all.

Bridging a pricing gap

Last year saw several aborted sale processes or processes delayed to 2026. This was for a variety of reasons. Whilst there is some greater optimism around the exits via IPO being a realistic channel this year, as is common with IPOs, there needs to be momentum to kick the door open and to keep it open.

Where pricing expectations may not be met, then alternative structures may be considered to provide liquidity. These include partial selldowns, the use of deferred consideration or earn outs to bridge the value gap, and the rising use of continuation vehicles. A few observations on these.

Partial selldowns can be useful for both buyers and sellers. Where a seller sees potential further upside, it allows the seller to have exposure to that upside. This structure may be seen in a secondary sale. Buyers on the other hand may take some comfort from the seller having some skin in the game with the structure being used where a founder remains a shareholder. Of course, these structures will necessitate the need for shareholders' agreements and planning on what a subsequent exit will look like.

Deferred consideration and earn outs enable a buyer to defer some consideration until hurdles have been met. This is not new deal technology, but its use suggests that there is a pricing bridge to navigate. Such structures, when used, can sometimes lead to disputes and so clear criteria, information flow and rules during the deferred period are essential. This is particularly the case where participants may have less ability to influence the ongoing performance of the business.

Continuation funds may be another structure that is adopted providing liquidity for the PE fund and in some cases LPs coinvesting. We think the use of continuation funds will increase in this market following their rising use overseas. When being used, funds should be sure to manage the conflicts appropriately and deal terms (including the economics) should be arm's length. Use of clean advisers for the incoming fund is important to mitigate risk.

Leveraged finance market – increasing liquidity, flexibility of borrowing terms and other evolving trends

Over the past year, the leveraged finance market has been characterised by heightened liquidity and intense competition among financiers. Private credit providers have responded with more aggressive pricing strategies, while traditional banks have shown greater willingness to participate in or underwrite institutional term debt structures, such as unitranches. This competitive environment has driven innovation in financing structures and broadened options for borrowers, reflecting a continued shift in market dynamics.

The market has remained favourable to borrowers, with financiers demonstrating increased flexibility in financing terms. Trends include greater acceptance of EBITDA add-backs, EBITDA cures, and expanded "basket" flexibility, providing borrowers with enhanced capacity to manage financial covenants and optimise deal structures. Competitive financing processes have also become more prevalent, with sponsors often running parallel processes involving unitranche and traditional senior bank financing options to secure optimal terms.

Several notable trends have emerged in leveraged finance, including a rise in the activation of accordions. Underwriting appetite has increased, reflecting financiers’ confidence in the market. Sponsor-led leveraged real estate deals, including in the build-to-rent (BTR) sector, have gained traction.

While importation of US and European documentation terms into the Australian market by strong sponsors is likely to continue, we have seen a number of financiers resist limited security packages (eg. security packages proposed by international sponsors covering certain material assets only, involving all-asset security from holding companies only or excluding particular jurisdictions). We are following this trend with interest.

There remains an ongoing focus by financiers on mitigating liability management transaction risks. It is nevertheless worth noting that financiers are becoming more appreciative of the differences between US and Australian standard documents, and commonsense drafting protections against liability management of transaction risks are being agreed when needed.

All of these developments highlight the evolving sophistication and adaptability of the leveraged finance market in Australia.

We anticipate further competition from traditional senior banks during 2026, and potentially also less focus by sponsors on features such as portability/IPO release conditions/stapled financings. We also expect that the trend towards dividend recaps, repricing and amend-extend-upsize transactions will continue in 2026.

Distressed opportunities and private credit

Private credit continues to play an increasingly prominent role in Australia's debt markets, with implications for how distressed situations are approached and resolved. Structural differences between private credit and traditional lending will continue to have an impact on future restructuring outcomes. Key pressure points on private credit funds – fund mandates, the need to deploy capital, the investment horizon of the fund and returns it needs to generate – cause private credit funds to think and operate in a way that is more like a private equity fund than a traditional lender. Private capital can be uniquely incentivised to maximise returns on each individual loan in a fund and have greater flexibility to do that in a distressed scenario.

The growth of private credit funds and the pressure on those funds to deploy capital has produced a greater range of options for companies in distress. An increasing number of traditional lenders are working directly with private credit funds on partial or complete refinancings of their exposures, which produce a greater return to those lenders than an exit via the secondary debt market. We expect that stressed and distressed refinancings will likely increase. Structures used to implement those distressed financings and restructures will become more creative and value accretive as private credit funds increase their share of the market. For example, debt to equity swaps have long been in the Australian restructuring toolkit, but we are seeing an increasing number of these occur consensually and out-of-court, especially where the lender group no longer includes any traditional lenders. Where private credit funds cannot hold equity or hybrid instruments, they are often able to involve a related fund to do that. Where that is not possible, many private credit funds are able to negotiate structures that solve a short-term liquidity issue while still providing returns commensurate with the risk. Well-advised borrowers are now able to work with lenders to create innovative solutions that may not have been possible even a few years ago. On the flipside, private credit will increasingly be a solution to distressed exposures for traditional lenders, either via a refinance or a trade on the secondary debt market.

As an increasing number of private credit funds enter the market, we are starting to see syndicate sizes grow, as an increasing number of banks and funds are interested in participating in a limited number of credits. This can increase complexity in distressed scenarios given there are more stakeholders to manage than in a tight syndicate or where there is a simple bilateral loan. We expect that credit funds that can advance larger loans will increasingly use this as a competitive edge.

Artificial Intelligence (AI)

It would be remiss not to address the transformative role of artificial intelligence (AI) in today’s business landscape. AI is no longer a niche technology – it is rapidly permeating nearly all industries and workflows, with the pace of change accelerating. For private equity investors, AI has become a critical focus due to its profound impact on business operations, industry innovation, and investment outcomes.

AI offers portfolio companies the ability to optimise operations, enhance efficiency, and drive significant earnings growth. By embedding AI into business models, owners can unlock new revenue streams, improve scalability, and differentiate their investments in an increasingly competitive market. The demand for AI-related assets is surging, driving higher exit values – data centres, for instance, have become highly sought-after due to their role in supporting AI-driven infrastructure.

AI is also reshaping entire industries. In healthcare, AI is revolutionising patient care through predictive analytics, personalised medicine, and improved operational efficiency and accuracy. In financial services, AI is being leveraged for fraud detection, credit scoring, and tailored financial solutions. Investors are also recognising the critical link between AI and the growing demand for digital infrastructure, including data centres and energy grids, which are essential for supporting AI’s computational needs. Moreover, AI is poised to transform the size and structure of workforces, a shift that is already underway.

From an M&A legal perspective, the rise of AI brings new complexities and opportunities. Due diligence will increasingly focus on the governance of AI systems, the terms of contracts with technology providers, data ownership and security, and management’s ability to execute AI strategies effectively. Additionally, broader workplace relations issues, such as the impact of AI on employment and workforce dynamics, will require careful consideration.