Timo Schmid, BCG

A 2020 forecast for Australian super funds lifting their private equity investments from $80 billion to $185 billion 2025 is conservative judging by recent moves in the sector, according to Boston Consulting Group (BCG) managing director Timo Schmid.

Australian Prudential Regulation Authority (APRA) shows $30 billion flowed into private equity in the year to December 2021 as equity market returns softened and fixed income returns stayed low.

Schmid, who co-leads BCG’s principal investors and private equity practice in Australia, said Australian funds are likely to follow the lead of Canadian pension funds which are routinely allocating 10 per cent to private equity.

“I think there’s a natural ceiling, how much risk you want to take…these investments are obviously less liquid,’’ he said.

He expects infrastructure, healthcare and stable consumer products will be targets while mandates and ESG “guardrails” will put up some “no fly zones” for investments.

“Australian superannuation funds love their infrastructure investments, as we have seen in the last 24 months, you know, from Sydney Airport to, to all the other assets that have been taken off the market,’’ he said.

“It’s not only one or two funds, I think the top, say, fast forward five years, 10 funds will all have some level of direct representation and overseas representation.’’

Schmid’s predictions followed AustralianSuper announcing it will pour $13 billion into private equity over the next two years.

The nation’s largest fund, with $260 billion under management, said this month it would invest $9.5 billion of that allocation into the United States, by 2024, with a mixture of both General Partner (GP) funds, alongside GPs in co-investment and co-underwriting opportunities overseen by a 20-strong PE team in its newly opened New York office.

AustralianSuper’s head of private equity Terry Charalambous said the Fund would increase its allocation to Private Equity from five per cent now to seven per cent in the next two years with overall private equity investments lifted to $50 billion within five years.

AustralianSuper has ramped up its PE allocations in the past 18 months to 10 transactions globally, working with GPs to deploy $3 billion in co-underwritten transactions and co-investments.

The move underpins forecasts from many analysts in response to low interest rates and softer returns from equities, including Mercer’s president, investment and retirement, Rich Nuzum, who said, in March, that super fund chief investment officers would look to alternative assets to drive performance.

Funds would need “more bang for the buck” for their risk by lifting allocations in alternative investments: private equity, infrastructure and venture capital, Nuzum said.

It comes as Bernard Reilly, chief executive of the newly formed $220 billion Australian Retirement Trust, the result of a merger between QSuper and SunSuper and Australia’s second largest super fund, said it would take a larger and more active role in big ticket investments could result in better returns for the fund’s members.

The nation’s third largest fund, Aware Super, with $150 billion under management, announced plans in March to open an investment office in Europe and invest $16 billion into European and US direct infrastructure and property deals over the next three years.

Meanwhile Cbus, just outside the top 10 with $68 billion in assets under management, is forecast to lift its two per cent allocation in private equity once a portfolio-wide review concludes in June, deputy chief investment officer Brett Chatfield told Private Equity International.

While funds continue to flow in from members due to record employment in Australia, Schmid says the the pace of PE investments may be tempered by the inflationary environment.

“If anything else, particularly if there is stagflation and interest rates at the same time, I do think we’ll see a little bit (less of the) the frothy valuations that we have seen in the past,’’ he said.

“It’s a little bit like the housing market. No one wants the housing market to crash, but if you’re buying assets, and you know, they have stayed for a long time at very high valuations, some interest rate rises might be, for some buyers, actually welcome news.”

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