Colonial First State CIO Jonathan Armitage

Jonathan Armitage’s $4 billion private equity team has been committing extra capital through the pandemic.

The chief investment officer of MLC, who helps oversee more than $167 billion of retirement assets, said the firm had recently signed off on a “couple of commitments” to their existing GP partners as well made an additional allocation to some new funds that are raising money. They have also been in discussions with managers about the slew of equity raisings that have come to the market.

“It’s a strong indication that we continue to believe in that part of the program,” Armitage said in an interview. “We think that it is absolutely the right thing to do for the medium-term returns for our clients and members. This will be a very interesting time to invest.”

Even so, there is already $13 billion of dry powder in Australia that is still waiting to be invested in private equity and venture capital, a recent Australian Investment Council report revealed. Last year, local private capital assets under management reached a record $68 billion.

While Armitage declined to provide an average on how much their private equity assets may have been impacted by the outbreak of COVID-19 (“it’s sector and company-specific”), others in the industry have. Hostplus said its PE assets had on average been devalued by around 15 per cent, while AustralianSuper said its private assets more broadly and lost an average 7.5 per cent.

Despite the economic fallout from social distancing measures to contain the virus, Armitage said private equity remained “very attractive.”  He added that the firm had taken a prudent approached to investments that had been made 12 to 18 months ago with each asset stressed test for a recessionary environment.

“We are very comfortable with the prices that we have been paying for assets,” the investment chief said. “But there are certain areas in the market we have not participated. There is still a lot of dry powder (around) so that hasn’t changed but do we think pricing will become more palatable?… Very likely.”

A report by research firms Preqin and FRG last month said that while the impact from COVID-19 would “depress” investment activity in 2020, capital calls were set to spike next year as fund managers take advantage of reduced pricing.

While Armitage conceded that some areas of the private equity portfolio had been affected from the current crisis, particularly in the consumer-facing and energy-related areas “that make up a small component,” other sectors like health care and technology were proving resilient. In particular, the firm expects valuations of Fintech assets to “remain robust if not rise in this environment.”

“Our own experience in 2009 is that investment opportunities emerge and our ability to take them during that period served us very well, particularly in private equity,” said Armitage who has held the top investment job at MLC since 2013. “At the moment, it’s a bit too early to say when or where they will emerge.”

Like many of their competitors across Australia’s $3 trillion superannuation industry, as financial markets began to tank and volatility became more extreme, MLC started to increase their liquidity position by selling some fixed income including corporate debt and some government bonds.

The firm also sold down some of its derivative strategies that were put in place last year to protect its listed equity holdings against a market downturn for “quite material profits”.  And while the cash allocation has risen, Armitage’s team has continued to buy stocks as part of a rebalancing strategy.

As of March 30, MLC’s My Super growth fund had 81 per cent of the portfolio allocated to growth assets compared to a target of 85 per cent. Around 6 per cent was invested in private equity, just short of the 5 per cent target, and around 56 per cent was allocated to both local and global equities.

Around 19 per cent of the portfolio was invested in defensive assets, versus a target of 15 per cent. That included 5.3 per cent in cash versus a 2 per cent target.

And while volatility has since subsided from the market turmoil in March and equities have recouped some losses, Armitage has held off making any significant changes to asset allocation just yet because if previous crises are any guide, “markets have tended to go back and retest the lows.”

“What we are facing now, none of us have really seen in our investing lives because you are seeing a very significant demand-side shock to the global economy,” the investment chief said.

“We are spending a lot of time on what earnings might look like in 2021 and 2022 and how much certainty there is around that. As things stand at the moment there is a wide range of possibilities….. and until we have greater clarity, you won’t see material changes to our allocations.”

That hasn’t stopped the team from investing at the fringes. Aside from committing extra capital to private equity, and buying stocks to rebalance the portfolio, they’ve also put a bit of money to work in the credit markets, particularly in the US mortgages where there were “very significant dislocations” towards the end of March.

And like many of their industry fund counterparts, they have cash set aside to snap up assets that may come to the market at a discount, whether it’s buying more credit or in the unlisted space.

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