Hostplus is joining forces with a global private investment firm to launch a private equity emerging managers program in the US.
The $50 billion superannuation fund is partnering with Flexstone Partners – an affiliate of Natixis Investment Managers – to develop a program that will invest in successor funds of US mid-market private equity managers over the next three years.
According to Hostplus CIO Sam Sicilia, Hostplus will allocate US$200 million to Flexstone to invest in underlying emerging managers as they are identified.
Sicilia said developing and maintaining long-term partnerships with investment managers, like Flexstone, is critical to securing privileged access to successor funds and future deal flow.
The CIO explained that the private equity emerging manager program is a natural extension of the super fund’s listed equities manager incubator program which has been running for more than 10 years.
“The manager incubator concept produces a win-win outcome for both the manager and for Hostplus. The manager receives early (and public) investment support from a cash flow strong investor (which effectively underwrites their business during the early years) while the super fund receives secured capacity and reduced fees,” he says.
He added that the private equity emerging manager program will allow Hostplus to establish relationships today with partners that may be future top quartile managers.
“If you believe that success in private markets is mostly about relationships, then it is reasonable to expect that providing early support to emerging managers will be repaid, not just by stronger returns and lower fees in future, but also by granting preferential access to subsequent capacity constrained funds raised by those managers.
“However, if you do not believe that success in private markets is mostly about relationships, then good luck with that!”
Flexstone is a specialist in US middle-market private equity which covers deals transacted at less than US$1 billion in value.
“Since this is a much less researched segment of the market, it provides great opportunity for investors to generate outsized returns,” Sicilia argues.
For short term-horizon investors, investing in an environment that is commonly referred to as late-cycle is generally not a good idea. However, as Sicilia points out, the stage of market cycle becomes an increasingly marginal consideration for longer time-horizon investors.
“For example, take the common view that PE can be “expensive” late in the cycle. This means that you will overpay for investments and therefore unlikely to get a good return on investment.
“Most investors stop thinking at this point and do not invest.
“However, longer-term investors have the luxury to ask a further question. Under what circumstances am I still prepared to invest? The answer depends on a myriad of factors, such as ability to negotiate further fee discounts, better access to subsequent fundraising, and of course the quality of any specific investment opportunity available.”
Nitin Gupta, managing partner at Flexstone Partners adds: “We believe successful US emerging managers program members tend to deliver higher fund returns, on average, compared to the returns of their former funds. In addition, with their successes, when they become more established, emerging managers may become increasingly difficult to access, as limited partners compete to get capacity.”
Currently, Hostplus has 7 per cent of its funds allocated to private equity, 13 per cent to unlisted property and 12 per cent to unlisted infrastructure.
