Asset owners in the Asia-Pacific region are currently assessing their private equity positions and considering whether to raise their allocations. One of Australia’s largest and most successful superannuation funds, QSuper, has successfully met the challenge of finding suitable investments that optimise its potential returns without upsetting the balance of risk.
The A$80 billion ($55 billion) Brisbane-based super’s head of funds management, Charles Woodhouse, told AsianInvestor how QSuper did it.
The story stretches back to 2010, when QSuper first took responsibility for private equity investment in-house. Prior to that, the private equity allocation worth some $500 million (1% of the portfolio at the time), was focused solely on primary fund investments with various managers.
“The Achilles heel was that it was a primary-only fund structure and we just needed to find more creative ways to get money in the ground. We found that by being able to scale it up under a single strategic relationship gave us as many options as we could use.”
QSuper modified its private equity approach in 2011 and put a new relationship in place with a single investment manager, Partners Group. “We found a way to achieve a far high level of invested-in-the-ground capital in any given vintage year. Since then, we’ve grown the portfolio to just over $3.5 billion in that single programme.”
As a result of this new relationship with the specialist Swiss-based manager, QSuper found a way to implement its private equity ambitions fully, enabling it to move its operational limit up to 10%.
“We don’t see 10% as a maximum allocation,” Woodhouse said. “If private equity is relatively attractive we are happy to have more of it, but we are in the middle of that range (5%) right now.”
Having found the right private equity manager, which Woodhouse said was all about “alignment between their business strategy and our member outcomes,” QSuper set about making the sector and asset allocation decisions.
QSuper has invested across different sectors and various types of investment, including primary, secondary and direct. In the last five years, they have also been co-investing with Partners Group.
“That is a measure of our conviction, in which we look through the investments where Partners have some extra capital and really try to target those investments where we think they have a high conviction, if it falls squarely in their expertise, in terms of a sector or industry, where they have demonstrated a strong record of adding value,” Woodhouse said.
For example, QSuper is co-investor in the largest direct investment Partners Group has made, in US healthcare cost management solutions provider Multiplan. “That was really a good example of where the Partners team can step in and take a well-run company up to a whole new level in terms of their ability to capture market share,” he said.
Another good example was Kindercare, the largest pre-school childcare provider in the US. Partners Group had a long history of working with education firms. “So when there was that extra capital available, we were very happy to step up and make a material co-investment beside them. And both of those have worked out well.”
Value-creation is a term often bandied about among private equity managers. Woodhouse reckons the approach QSuper has embraced is a deliberate move away from the model where a manager might just be gatekeeper to their capital.
“We can be our own gatekeeper, so for us it’s more about having a manager with a deep bench of talent,” he said. “When they do invest in a company that has a weakness in a certain area, our [general] partner can help guide management, or they will second members into an asset to try to drive that extra value.”
It’s a throwback to traditional ideas of private equity and, as Woodhouse said, “a move away from the financial engineering aspects to really try to get strong earnings growth. We’ve done the same with our real estate and infrastructure investments.”
With the greater weight of institutional capital now moving into the private equity space, there is a risk that the best deals become crowded but, for Woodhouse, this hasn’t so far constrained QSuper’s ability to put capital to work.
Size is important and as one of the biggest Australian asset owners, QSuper has the ability to deploy large amounts of capital in the bigger deals.
“We get a lot of transparency in terms of the assets when they come up. And with the ability to write sizeable investment cheques, we are able to act where others are not. Sometimes quick decision making is the difference between winning or losing a deal. It’s not always about price.”
The super fund is finding investment opportunities also in emerging Asia. “There’s been a bit more of a tilt towards emerging markets recently. We’ve realised that the developed markets, where most of our investments are on the unlisted side, are probably going to be lower growth markets going forward.
“Emerging markets represent 10% of our overall portfolio, which is the highest it’s ever been. But we are doing that with a high degree of caution. These markets behave differently and the market opportunities are more sporadic.”
Chart: QSuper's Global PE Allocation