Craig Thorburn, the director of emerging markets at the Future Fund, says private equity investments focused on venture and late-stage growth companies are proving to be highly attractive, with the sovereign wealth fund making plans to increase allocations across a number of steadily maturing managers.
Speaking on a panel at the Conexus Financial Equities Summit in Melbourne, Thorburn said much of the fund’s $19 billion private equity program was focused on China.
“Where China does stand up is in the growth and venture space, so much of the 8 per cent of our private equity program, or 77 per cent of emerging markets exposure in private equity is around the venture and growth space,” he said. “For us, this is probably one of the most exciting areas in the emerging markets universe, and will continue to grow over the next five to seven years.”
In the emerging markets asset class, as of June 30, 2018 the Future Fund has allocated 66 per cent to listed equities, followed by a 16 per cent allocation to private equity, with China making up 38 per cent of its entire emerging markets exposure.
Future Fund chief executive David Neal said in August the fund would continue to invest in private equity, on the back of a benchmark-beating return for the year to June, which was assisted by a strategy of moving into riskier asset classes.
“It provides us with an exposure to the parts of the economy and markets that you can’t necessarily access through the listed markets, and the opportunity to access additional returns through the application of skills,” he said. “But you have to be careful whom you trust your money with in this space.”
Thorburn said the Future Fund had a bias towards local managers over international managers with an “outpost”.
“But it takes time to build those relationships, understand the culture and the workings of the marketplace,” he said. “We’ve gone down the incubator or feeder type approach. We have a raft of managers…probably $30 million – $50 million in size. Over the next five to seven years, as they grow and mature and get more experience, those managers will figure more prominently in our plans for China.
“You’d expect those cheque sizes to grow and hopefully the returns will be demonstrable in terms of having that greater impact when it comes to moving the needle in our portfolio allocation.”
Speaking on the same panel, Aberdeen Standard Investments senior investment manager Mark Gordon-James agreed that there were opportunities in mainland China on the back of China A-shares debut on the MSCI’s emerging markets benchmark in June.
“We don’t know what’s going to happen, but there is a very interesting opportunity set in mainland China that’s now been opened to foreign participation,” Gordon-James said. “So having a [local] research team and fund management team that can delve into mainland China to do research is going to be very, very important for fund managers wanting to lead the pack in emerging markets.”
Emerging markets managers had been challenged as a “whole host of nations have lost their way in terms of growth” Gordon-James said.
“China is going to grow as a proportion of the index, especially as the sharemarket entered the market [in June], but in five years, it’s highly likely it will represent 10 per cent or [more] of the market,” he said.