AustralianSuper opens NYC office, offshore private debt portfolio to focus on US, Europe

Australia’s largest superannuation fund has opened its US office in New York as it focuses its private credit portfolio on developed markets.

The AU$225 billion ($163.8 billion) fund opened its New York office in late August after a year-long delay due to Covid-induced travel restrictions.

AustralianSuper has committed to tripling its private debt investments to AU$15 billion by 2024, the fund said in a statement in July.

On top of its New York office, the fund also has a three-staffed London office dedicated to private credit. The team has another seven people based in Melbourne, and will add six more across London and New York over the next 12 months.

DEVELOPED MARKETS

Of its current AU$5 billion private credit portfolio, roughly three-quarters is in real estate debt across Australia, Western Europe and the US.

Nick Ward, Australian Super

“In terms of regional focuses, we still quite like Australia. But the size of the market is pretty small. We’ve largely outsourced the Australian component for real estate lending to a manager who does real estate construction finance on our behalf. And that's the lion's share of Australia,” Nick Ward, newly appointed head of private credit at AustralianSuper, told AsianInvestor from Melbourne.

“And then the other two geographies that we are focused on is Western Europe and North America. We have a big exposure to the US in terms of some of the deals that we've done in the last 12 months. I would say we’re pretty selective, around the theme of playing to the winners and losers out of Covid,” said Ward, whose plans to move to the New York office were put on hold due to the pandemic.

On why the fund is not looking to invest in Asia’s private debt markets, “I would say we just don't know the markets in Asia,” he said.

“We don't know China or India, which are the two markets that make the most sense to look at just because of our size and the size of those markets. We would need to do some work on that or actually partner with a manager to hold our hand to get familiar with the space first,” he said.

As for other Asian markets, “some of the smaller countries, you sort of question whether you’re going to get the scale needed to make the size of investments that AustralianSuper is looking to make.”

The AU$225 billion super fund, Australia’s biggest, is targeting large loans of at least AU$100 million as part of its private debt strategy, the fund said in the July statement.

OFFICE AND RETAIL

Despite a rise in interest among institutional investors for data centres and logistics real assets, AustralianSuper’s most notable deals have been in the more traditional spaces of office and retail assets.

“I think retail is a bit of a bad word, just generally across the market. When you say retail, people paint it with the same brush and they just don't look at the opportunity. There are plenty of malls in the US, and they're not all going to disappear,” he said.

“Maybe the bottom 10 to 20% will, but there’s also going to be a lot that survive and a lot that actually thrive as a result, because you'll see consolidation. Where you used to have four or five really big malls in a big city, that that might reduce down to one or two,” he said.

The fund invested “in some mezzanine debt” into a large shopping mall in Chicago, which has outperformed, Ward said, without providing more details.

The fund also recently completed an office deal in Manhattan, and a new build in the San Francisco Bay Area.

“It will be brought to market in a few years, and caters to hybrid working. It will be a new build and has AR (augmented reality) and VR (virtual reality) to cater for any long-term Covid issues,” he said. “It’s pretty close to Silicon Valley. So it's playing on the strength of the area as well. We like that dynamic in terms of offices.”

“There's no doubt offices are going to survive,” Ward added. “To us, it’s more of an equity risk if people are going to renew and re-lease for the same amount of space… The assets that are going to struggle are the older assets. There’s definitely a flight for quality,” he said.

“People are also talking about suburban offices over city offices, given that people are decentralising a little bit with the work from home phenomenon. But we still think that mega cities like New York, London, etc, are still going to be hugely viable. It just depends on the particular office that you're talking about,” he said.

MOVING IN-HOUSE

AustralianSuper has been relying on managers in Europe and the US, but will eventually move some of the investments in-house.

“We’re looking to hire someone to lead infrastructure debt strategy globally; we’re open to that being in New York or London. But we will have a dedicated role on the infrastructure debt side and doing that all directly in-house,” Ward said.

He added that having managers has been useful in helping the fund get to know the market and as a source of origination, but the fund will move to reduce reliance on them over time.

“As we build the internal team, local hires will bring local expertise and we will be able to manage the assets ourselves and stand on our own two feet,” he said.

This would apply to both Europe and the US, but for the latter, “given we've only just opened the office there, and we're still looking to ramp that up, that's probably a number of years away.”

The fund also has AU$14 billion in property equity investments and 7% allocated to property in total. The proportion will be maintained for now, “but as the fund doubles in four to five years’ time to AU$400 billion, that property exposure is going to need to double as well,” Ward said.

Look out for part 2 of this story that delves into why asset owners are focusing on developed markets in their private debt portfolios, and the pitfalls to look out for.

AsianInvestor is focusing on private markets for the month of September. Read more:

China PE still attractive despite tighter regulatory scrutiny

How asset owners are benchmarking alternative investments

Funding gap persists in Asia Pacific even as funds pour into private credit