By Alison Tudor, Asia Private Equity Correspondent

TOKYO, Feb 2 (Reuters) - A former banker at Australia and New Zealand Banking Group Ltd said on Friday he has jumped ship to set up a new private equity fund trawling the smaller end of the market for deals.

Australia has been the hottest market in Asia for private equity of late, with eye-catching deals such as the $8.7 billion buyout of Qantas Airways boosting funds' investment more than nine-fold last year.

Deal-making is set to continue at a fast and furious pace as the volume of new Australian funds jumped 89 percent in 2006, according to data compiler AVCJ.

Jeremy Samuel, erstwhile ANZ director and chairman of the bank's private equity management committee, said as founding managing director of Anacacia Capital he hopes to hit the market's sweet spot, avoiding mega-deals where valuations are sky-rocketing.

"Many funds have grown rapidly in size and vacated what has traditionally been the most profitable arena for Australian private equity," said Samuel, who prior to joining ANZ worked at consultancy Booz Allen, during an interview with Reuters from Sydney.

While many other private equity firms focus on larger, often public companies where they compete with multiple buyers, Anacacia Capital will look for small to medium enterprises with earnings before interest and tax of less than $10 million per annum.

Investors are hunting for private equity funds investing in this space because of the attractive returns they offer.

The average return on deals in 2001-2003 was 41 percent when the average enterprise value of the targets was $140 million. But in 2004-2006, when deal size rose to $209 million, returns dropped to 24.2 percent, according to data gathered by an Australian fund.

ROLL PLAY

The firm expects to invest alongside management in management buyouts and provide growth capital for acquisitions. It will take stakes of between 30 and 80 percent in the companies.

Roll-ups, whereby medium-sized organisations with operating synergies are packaged together to create a substantial investment vehicle for private equity funds, are relatively common in Europe with over 400 such transactions having been completed.

In Australia, the strategy is less popular, but this may change as acquisition multiples increase for large targets and funds look to alternative strategies.

With the ageing baby-boomer population moving into retirement, a recent Reuters-KPMG survey estimated that over 500,000 privately owned companies will change hands in the next five to 10 years in Australia.

"(Small and medium-sized enterprises), particularly family-owned businesses, are crying out for ways to manage ownership change, succession and acquisitions," Samuel said.

At ANZ, Australia's third-largest lender, Samuel helped grow the private equity business to the point where the bank had allocated $400 million from its balance sheet there, and raised over $100 million from fund co-investors.

Anacacia Capital is setting up a Business Advisory Council, comprising about a dozen chairmen and chief executives of Australian corporations to help his portfolio companies.

While not common in Australia, European and U.S. private equity firms are increasingly using the same approach.

The capital for Anacacia Capital's fund is coming from a mixture of institutional funds and high net worth individuals and families. The firm is preparing for a mid-year capital raising. 

© 2007 Reuters Limited