The A$10 billion Melbourne-based superannuation fund HostPlus has made its first China-dedicated private-equity investment, giving a A$100 million mandate to New York-headquartered private-equity fund house Siguler Guff.
This is a departure for HostPlus, which is increasing its allocations to global emerging markets but has left it to third-party managers to make country allocation decisions.
But HostPlus wanted extra exposure to China, in a segregated portfolio that would enable it to control capital deployments, says Sam Sicilia, CIO at HostPlus. “Sigular Guff is a platform that allows us to understand Chinese private equity,” he says, speaking at a recent AsianInvestor conference in Tokyo (see event gallery).
The mandate was funded in April and follows a separate decision to set up an in-house incubation fund for Asian managers. Sicilia says the goal is to get early access to boutique Asia-focused managers at a relatively low fee.
He notes that the wall of contributions flooding Australia’s superannuation system means a rising amount has to be invested globally. Hostplus, for example, has to place A$1.1 billion of cash each year, an amount that will continue to increase.
That should mean a rising allocation to emerging markets, which are on track over the coming years to provide up to 75% of global GDP growth; often boast better economic fundamentals; whose stock markets are usually valued at a discount to developed markets; which in many cases offer a growing population, rising education levels and a growing degree of social aspirations. “Never underestimate pride,” Sicilia notes.
HostPlus has a direct exposure to emerging-market equities of 17%, along with a 16% allocation to Australian equities. But taking into account Australian or Western companies with high cash revenues from emerging markets, and the support that exports to EMs has on Australian consumption, Sicilia calculates the actual exposure to emerging markets is 34%. “We want to get it to 50%,” he says, via international or domestic equity mandates, as well as unlisted properties and infrastructure projects.
Sigular Guff manages funds of private-equity funds. It has had a China-dedicated fund of funds since 2006. Hostplus’s segregated mandate is expected eventually to invest across five to 10 general partners, along with co-investments from some of those underlying managers.
The mandate took much longer to arrange than other outsourcings, says Sicilia. Due diligence took six months. Sicilia notes that trading and custody costs in markets like China and India can be 15 times as great as those in Australia, and getting the right services on the ground takes time.
But some of the toughest detail work involved getting things right between Australian and US tax and trust laws.
For example, HostPlus had to understand and resolve the differences between Sigular Guff’s US definition of duty of care and negligence, versus Australian practice. For HostPlus, it was essential to have the final say over removing a GP, for example. It also wanted to ensure the fees and charges were to its liking.
It had to be sure that it was protected against drawdowns, which under Australian law cannot be treated as a lien against superannuation fund assets. There were also tax issues unique to Australia that, if not properly structured, could subject HostPlus to realising all its gains annually, as well as tax considerations under Delaware laws that required waivers from Canberra’s tax authorities.