Despite record high prices in private equity, Australia Super is upping its allocation to the asset class and looking to underwrite big-ticket deals offshore.
Terry Charalambous, senior portfolio manager with the nation’s largest superannuation fund, said three years of co-underwriting deals locally had spurred the fund to search for similar opportunities offshore. Now, the fund is rolling out co-underwriting internationally, writing multi-hundred-million-dollar equity cheques to secure major deals.
The partnership model has worked well for the fund locally. Last June, the fund teamed up with local private equity group BGH Capital to buy the Navitas, the education firm, for $2.3 billion. Charalambous said Navitas was a co-underwriting deal and a natural progression from co-investments which are smaller and later stage in the transaction process.
He said the benefits of a co-underwriting structure include being brought into the deal process much earlier, gaining deeper insight into the investment case and working closely with managers on due diligence.
As for the state of the market, Charalambous said there were enough encouraging signs to continue investing even in an expensive market. He added that he was not seeing the “frothiness” in the market with managers raising excessively larger funds. He also said that the managers AustralianSuper were partnering with were not deploying capital too fast and were in some cases, investing slower than he had expected.
Ultimately, Charalambous said can’t see private equity prices rising higher than the current purchase multiple of almost 12.
McKinsey & Co’s latest global private market review confirmed that deal volume for private equity was flat at US$1.47 trillion in 2019 after growing 12 per cent annually for the previous five years. Deal volume has also declined in every region except North America, where capital invested rose 7 per cent to a new high at US$837 billion, according to the consultant. Meanwhile, global deal count fell 13 percent to about 9,300 deals, the first drop since 2009.
Charalambous said AustralianSuper was allocating more to private equity because the asset class had outperformed listed equities by 7 per cent per annum over 5 years and 10 per cent per annum over 10 years, after fees.
He added that the $180 billion superannuation fund had been actively deploying capital just to hold its current 4 per cent allocation steady, given the flood of cash flowing into the fund via new members. Inflows rose 42 per cent to $28.5 billion in 2019.
“We are seeing see opportunities that offer attractive expected returns – even in this environment,” Charalambous said. “Depending on how large an equity cheque we write, we can also gain governance rights after we acquire the business, including the right to appoint a director.
“We are able to write very big cheques because of our size; hold investments longer term because of our growth and we frankly have access to relationships that many other super funds don’t have.”
Further, AustralianSuper’s growing size gives it more credibility when competing with the bigger global funds, he added. Charalambous said the fund was seeing a wide range of opportunities from its network of relationships from light touch deals – where they are backing strong management teams in very high-quality businesses – to complex turnarounds and structured securities. “We are flexible,” he said. Furthermore, we are building international capabilities for the long-term.”
The executive also claimed that having more people on the ground would give the super fund more clout. “The buildout of AustralianSuper’s New York office, which will open later this year, will position the fund to take advantage of the deal flow and set itself up in international markets as a partner of choice,” he said.
Charalambous confirmed the private equity portfolio is already heavily weighted offshore – predominantly in the US and that bias will continue for the foreseeable future.