Australian superannuation funds are expanding their modest investments in private equity markets but they must ensure they have the skills required to become direct and co-investors.
McKinsey & Company partner Eser Keskiner, who has almost 25 years of experience advising sovereign, pension and endowment funds and private equity firms, said at a conference that Australian funds need to gain the skills required.
It is a “recipe for failure” for funds to co-invest as a lower-cost way of getting private equity exposure without thinking about their internal capabilities, he told attendees at the Investment Magazine Real Estate & Private Markets Conference in late February.
“Fund-of-funds investment takes a different skill set,” Keskiner said. “You need to build your due diligence capabilities and, depending on the stake you’re taking in assets, increasingly you might find yourself taking board seat positions, getting involved in the day-to-day, in some cases operational. Those are all new skill sets to build.”
Australian super funds now have about $30 billion in private equity assets under management, just 2 per cent of the $2.5 trillion system. But growth in the sector has been rapid, in line with the global co-investment market, which grew from about 3 per cent in value to 22 per cent of global private equity investments in the first 15 years of the millennium.
Hostplus head of private equity Neil Stanford told the conference the industry fund’s assets under management had “grown like a weed” – from $15 billion to $30 billion in less than four years – and it was always looking for investment opportunities, including private equity strategies.
Australian super funds’ combined private equity assets are worth about $30 billion now but are expected to grow between $50 billion and $60 billion in the next few years. This was still be a modest 2 per cent of the $2.3 trillion super system.
“Hostplus was an early PE investor, we started in 1999,” Stanford said. “The problem is we’ve still got some of those investments and we’re trying to get rid of them.”
Hostpust built its private equity portfolio with a $50 million delegation in October 2015. The fund made 30 co-investments equally in buy-outs, growth and late-stage venture capital companies and injected another $125 million in the sector in December 2017, including scaling up its earlier investments, Stanford said.
While the first $50 million was “subscale” for many buyouts, stakes in earlier-stage investments allowed the fund to get a “toehold” position in fast-growing startups that gave access to subsequent equity rounds.
“Particularly in the venture space, we’re prepared to do smaller investments if it means we get a toehold position,” he said. “If we’re happy with them, we can step up and do larger amounts.”
Keskiner said many institutional investors were looking to the sector for intelligence, along with lower fees and better returns.
“Institutions are going into venture capital not necessarily for returns but to keep their pulse on the market, using early-stage companies to understand all the disruptive trends and use that information to shape their broader portfolio,” he said.
Super funds needed to find a “value proposition” to stand out from other funds that might want to co-invest.
“Capital is cheap. What is not easy to come by is differential capital with access to certain individual expertise, track record and senior advisers,” Keskiner said.
His advice to prospective private equity co-investors was to be clear about what internal capabilities were required, and to be aware of the fast-paced nature of investments and governance required to respond.
“What is your value proposition? Why should a GP [general partner] see you as a co-investor compared with the super fund next door?” he asked.