Aussie supers look to global private equity plans

While some of the more liquidity-constrained super funds have little more than 1% in private markets, the more active funds are taking a more global approach after years of home bias.
Aussie supers look to global private equity plans

Australian asset owners have more global private equity (PE) investing opportunities than ever before, but they need to do their homework if they are to find the right funds and fee levels, industry executives told PE fund managers at a conference in Hong Kong last week.

The limited partner (LP) investors, representing superannuation funds with varying mandates, explained their rationale for investing into PE at the SuperReturns Asia event last week.

David Simons, director of private equity at the A$130 billion ($102.05 billion) Future Fund advised fund promoters that “Australia is a tough place to raise money from, so plan on coming a number of times and building a relationship over a period of time”.

First time funds from overseas are much less likely to get a look-in with Aussie asset owners, he added. But those that convince super funds of their credentials can conduct a more global approach to PE investing, said Alicia Gregory, head of private equity for MLC's A$12 billion super fund.

“In the 2000s, most of the super funds active in PE were just doing Australia and they weren’t being benchmarked to global standards,” she said. “But in the last 10 years, the Australian market has evolved a strategy quite like ours, which is much more global in nature and with a more concentrated portfolio of Australian managers.”

MLC has 6% of its overall portfolio in private equity, much higher than the market average. Gregory argued more liquidity in private equity exists today than 10 years ago.

“There’s some really interesting elements in Australia right now, that make it more attractive than any other period that I have seen in the past 15 years,” she said. “You are finally seeing the shake-out of what I would call a lazy market.”

Delivering demonstrable returns

Adrian Kerley, private equity portfolio manager with the A$4.2 billion Commonwealth Super, said the superannuation fund has a very specific need for demonstrable absolute returns.

“We’re not regional allocators, we’re bottom up and we’re looking at the illiquidity premium [offered by private equity funds] to validate an investment,” he told the conference attendees. “We consider how managers create that alpha and how sustainable it is. If a manager doesn’t pass that screen, then we won’t enter into a conversation with them.”

Additionally, Commonwealth Super demands the fund managers it employs think of themselves as fiduciaries “in the same way we do; that it’s not our money, it’s our members’ money.”

“The more sophisticated GPs get that [requirement],” he added. “If it’s mainly a negotiation about fees or transaction cost offsets, then the alignment is probably not there, which is big red light for us.”

That said, fee levels are important because they impact the potential returns asset owners can attain, said Gregory. “It’s not just about saying I want 15% [in annual returns]; it’s gauging the value of what you are getting for the fee pay-out,” she said.

“We wouldn’t be looking after the best interests of our members if we weren’t looking more towards the funds with lower fees. The reason for that is if you are paying away 3% [in annual management fees] in those early years, you are taking on potentially more risk in terms of underperformance.”

Big, but basic

The Australian market’s sheer size makes it appealing for PE funds. Yasser El-Ansary, chief executive officer of Avcal, the Australian Private Equity and Venture Capital Association, noted the country has the third highest global pool of accumulated savings, at A$2.2 trillion.

But it’s highly fragmented. “There’s a very long tail of investors that sits behind the top five or six pools of capital in the country,” Simons said. “Those funds struggle with building internal teams and they tend to be more conservative.”

El-Ansary added that as a result many Australian supers are still unsophisticated when it comes to PE, investing less than 2% of their assets into the asset class on average, according to Avcal’s data.

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