As a record amount of money chases private equity deals and pushes prices higher, two of Australia’s largest super funds are limiting their exposure to around 5 per cent, preferring publicly-listed companies instead.
UniSuper’s head of equities Simon Hudson said while the $80 billion industry fund is “agnostic” on whether a company is publicly or privately held, many unlisted companies were now trading at higher multiples than their listed peers. First State Super’s Robert Credaro said they had moderated their holdings in growth-equity investing as the area had gotten “very hot.”
“Valuation is a big deal,” said Hudson, speaking on a panel at Investment Magazine’s Equities Summit in Sydney. “A lot of private equity companies are asking for valuations at the same level as their listed peers and are being dressed up as something they are not. The experience in Australia hasn’t been great.”
A Willis Towers Watson report found that many institutional investors were shrugging off signs of overheating in private equity to allocate more capital, as an increasing number of companies stayed in private hands for longer. Researcher Prequin Ltd. estimated that the amount of so-called dry powder waiting to be invested in private equity hit US$2 trillion last year.
Credaro, head of growth assets at First State which is in the midst of merging with VicSuper, said there was too much capital chasing private equity deals and too much money being raised by US firms like Insight Venture Partners and Vista Equity Partners that had chased prices up too far. He said that as the mega funds raised billions of dollar from investors, his team sold off some of their growth assets over the past 18 months which had already done “exceptionally well” in the portfolio.
Trillions of dollars
“It’s the timing of private equity at the moment,” he said on the same panel. “Why not do it in public (equities) where you can get good pricing and see the market. It’s just common sense. Don’t let one thing result in additional risk.”
QIC’s head of global private capital Marcus Simpson conceded that with trillions of dollars sitting on the sidelines, and more and more money coming in as people saved, private equity was getting harder. Even so, he said there was still enough choice for the $85.7 billion firm to “make good investments going forward.”
During the panel discussion, Simpson said that he too was “amazed” at some of the valuations being touted by the Australian media ahead of a local company’s initial public offer.
“We are tracking many of these companies to see how they are described in the press and what the perceived valuation is, and think you have got to be joking,” he said. “I think everyone’s expectations have increased and what should be real value often gets ignored.”
Simpson, who has more than 20 years experience operating in the private equity space, said the dynamics in the market had changed as big start-up companies, like home-rental business AirBnb, delayed going public. He said investors like Softbank, itself in the media spotlight recently after the market balked at its US$47 billion valuation of WeWork, had helped many firms to stay private for longer.
“When you get to about $3 to 4 billion market cap, companies can still sell to another bigger private equity provider and at some stage, if you want a big one, you can go and knock on Simon (Hudson’s) door,” he joked.
Private for longer
Hudson said that he would prefer to see companies stay private for much longer than the five years that private equity funds typically hold an asset for. He said while it was easier and cheaper to invest in public market equities, where there was more room for error if an investment goes wrong, it didn’t preclude UniSuper from looking in the private space because they did the same due diligence regardless of the capital structure.
“We are looking at two right now,” he said, without naming the companies. “One is about to IPO and the other one is in the unlisted space. There is an element of exclusivity which can be very rewarding.”
First State’s Credaro said the fee complexity and illiquid nature of private assets saw their allocation “tap out” at around 5 per cent.
Jana Investment Adviser’s senior consultant Bill Dwyer said while most of the super fund clients kept their allocations to private and public equity investments separate, the lines were “blurring.” On the listed equity side, portfolio managers were increasingly looking to buy “IPO companies” as part of their mandates. And on the private side, there was an emergence of open-ended funds “with more of a buy and hold approach” rather than a typical closed-end structure.
“There is still clearly the distinction in terms of asset allocation, but there is evolution on both sides which is breaking down the barriers,” he added.
As for the market outlook, Hudson said he expected to see “another leg up” in equity markets and added that the longest bull market in history “still has a way to go.” Credaro said he was a “bit more pessimistic” and expects to see the market return around 6 or 7 per cent in the medium term. QIC’s Simpson cited US buy-out group KKR, which is forecasting 5 per cent for public equities and 12 percent for private equity over the next five years.