Aussie supers diversify private equity investing plans

Australia is the one Asia Pacific market to boast a sizeable number of asset owners with a lengthy private equity investing record with private equity investment. Many of the country’s superannuation funds have invested some of their assets as limited partners, or co-invested with private equity funds.

However, leading supers don’t necessarily agree on how appealing the asset class is in today’s environment. Some feel that plenty of opportunities remain, provided institutional investors partner with the right companies and move quickly.

Other funds feel the international private equity space is becoming crowded, with opportunities harder for Australia-based investors to sniff out and more expensive and potentially risky as a consequence.

One of Australia’s largest proponents of private equity investing is Brisbane-based pension fund QSuper. Charles Woodhouse, head of funds management at the A$80 billion ($55 billion) super, noted the super fund has shifted its approach to solely use investment manager Partners Group for its private equity needs, instead of a previously fragmented approach before 2011.

It’s worked out well for QSuper. The fund turn took what was once a A$500 million private equity portfolio (in 2010) and has grown it to A$3.5 billion. QSuper’s current private equity allocation is 5% of AUM, but it’s changed its operational limit to allow it to move this exposure between zero and 10%, as it sees fit.

“We found a way to achieve a far higher level of invested in-the-ground capital in any given vintage year,” Woodhouse told AsianInvestor. He said working with one fund manager has given the fund much more transparency on asset investment opportunities as they arise, while its governance structure and ability to write big cheques means it can move quickly; “we are able to act when others are not”.

“The Achilles heel of the old set-up was that it was a primary-only fund structure and we just needed to find more creative ways to get money in the ground,” he explained. “We found that by being able to scale it up under a single strategic relationship gave us as many options as we could use.”

He added that while superannuation funds are typically fee-conscious, they shouldn’t allow it to prevent them from acting quickly and decisively.

“You may find a situation where a seller wants to sell within the next couple of months, so you need to be able to bring the resources together and bring the information together in such a way that quick decision making is the difference between winning or losing a deal.”

CUTTING EXPOSURE

But not all Australian asset owners aiming to add more private equity.

Grant Morrison, head of private markets at Melbourne-based superannuation fund Cbus, told AsianInvestor that it intends to cut its allocation total private equity exposure from close to 5% down to just 2%. It wants to completely wind down its international private equity allocation because it has been costly in terms of fees, takes a lot of resourcing and faces pressure to execute deals.

Cbus essentially thinks it could enjoy better returns and raise its investing scale by focusing on local private equity investments.

“One of the key reasons was our limited ability to gain scale and maintain alpha,” said Morrison, adding that the reallocation of risk capital within the fund also weighed on the decision to let the international private equity allocation start to run down.

“[We wanted] the ability to have a greater level of control of what we are investing in and having higher quality investments without the return dilution that can occur when you widely diversify your portfolio globally,” he added. 

Unlike QSuper, Morrison argued that the ability to enjoy some more control as a big investor didn’t outweigh the cost.

“You get limited benefit in terms of fees. Every time a manager raises a new fund, it’s back to the drawing board,” he said. “You’ll get reasonable access, but you won’t get the benefits of scale on fees as you do in listed equity markets.”

This story was adapted from a feature that originally appeared in AsianInvestor Summer 2019 edition.