As Australian superannuation funds grow bigger they are tipped to start buying up listed companies, triggering the biggest shakeup in public markets in years.

AustralianSuper’s $2.1 billion takeover of education group Navitas with private equity partner BGH Capital, and QIC’s $470 million bid for Pacific Energy, is said to be just the start of a wave of local asset owners taking public companies private. The Future Fund’s chief executive David Neal said that while his team had no plans to participate, others would.

“There is support for it,” Neal said at an Investment Magazine conference last week. “When we are down to five or six massive industry funds in this country, if they wanted to they could buy corporate Australia. They could take it all private. Slightly extreme, but their scale is such that you could imagine them doing that if they believe that it is a better model.”

This year is set to be the biggest for Australian corporate privatisation in a decade with more than $10 billion in deals announced including KKR’s $1.6 billion takeover of accounting software firm MYOB. That’s up from $3.5 billion in 2018. And with super fund mergers accelerating in 2020 to create larger pools of capital, they will have the scale to participate in a takeover directly rather than via a private equity fund.

AustralianSuper, whose assets are forecast to reach $300 billion in five years, indicated that as a “high-conviction investor” they could do more public-to-private deals. The country’s largest super fund had also tried to buy hospital operator HealthScope with BGH for $4.1 billion in 2018, before they lost to Canada’s Brookfield Asset Management and sold their stake.

Seeking Change

“We seek to acquire meaningful investment positions in preferred companies, engage regularly and provide capital directly,” said Shaun Manuell, senior portfolio manager of Australian equities at the $170 billion fund. “In situations where we see opportunity to unlock value, or avoid value destruction, we may partner with like-minded (firms) to support or seek change.

“We are capitalising on the opportunity to leverage our expertise, along with the fund’s scale and long-term investment horizon, to enhance performance by investing more directly in Australian companies.”

So too, it seems, are others. Dry powder amongst local investors jumped 31 per cent last year to $11 billion and the value of deals jumped 64 per cent for private-equity backed buyouts and 200 per cent for venture capital, according to data compiled by the Australian Investment Council. On a global basis, private equity capital yet to be invested hit $2 trillion in 2018, according to Preqin.

Hebert Smith Freehills said the interest from institutional investors in Australian public mergers & acquisitions was growing. Adam Charles, a partner at the law firm in Melbourne, said the AustralianSuper and QIC deals marked a “really important development for Australia’s capital markets.”

“You can’t look at a super fund on the share register of a public company in the same way,” he said. “You now need to consider whether or not it could also become a bidder for the company.”

Unlike a corporate buyer that wants to pay as little as possible or a private equity firm that may need to sell out in five years, super funds could be seen by targeted companies as long term providers of finance that will help them grow without the scrutiny of public markets. Charles said that whether a super fund was taking a company private, underwriting a capital raising or helping a firm to stay private for longer, they were getting involved in transactions in a way that didn’t happen 10 or 15 years ago. “It’s a trend that will only accelerate,” he added.

CEO David Neal is “not convinced”

Future Fund

For now, Australia’s two largest asset owners take an opposing view on the merit of adopting a private equity-style strategy. Whereas AustralianSuper may look to do more, the Future Fund’s Neal said he is not convinced that it’s worth the extra time and cost. He also said that it would become an issue for listed markets as the number of investable companies shrink.

“It’s not that I don’t see the logic in the strategy, it’s just that I don’t think it’s as a compelling proposition as others do,” said Neal, who oversees $200 billion, in an interview. “That is what makes a market. There are people who believe in the better governance model of private and are worried about short-termism in public markets.”

The Australian Stock Exchange said it was not overly concerned, at this stage anyway. Unlike the US, UK and Germany where public markets have shrunk, it said the local market remained “vibrant.”  The total equity issuance for the year to June on the ASX was $86 billion, up from $82 billion in 2018.

“In Australia we have a bit of a unique situation where we have a very active market for small to mid-cap listings,” said James Posnett, ASX’s senior managers of listings. “These companies find natural owners in the public market.”

At for the bigger end of town, Posnett said it would take time for the public-to-private trend to play out which was being fuelled by record low interest rates. “It’s certainly on our radar but in terms of overall issuance, the market is not shrinking.”

As for AustralianSuper’s part, the fund said it was always looking for “new ways” to source investments.

“Capital markets continue to evolve,” said Manuell. “In this environment, there is an opportunity for innovative thinking to propose new models to replace the traditional fund and intermediary relationships.”

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