First Super’s direct investment strategy in mid-market private equity companies in Australia and New Zealand for the last three years has paid off handsomely. Returns from its private equity investment for the 12 months to June were 28 per cent, boosting its showing under the Your Future, Your Super performance test.
The $3.7 billion super fund changed tact to gain direct control of its investments after encountering issues with its investee companies. The fund was previously invested in blended pools as a limited partner with local private equity sponsors such as Archer Capital and Quadrant Private Equity through its long-time manager Stafford Capital Partners.
“As a small investor, we didn’t have a lot of ability to influence decisions that were being made by the general partners and that’s the nature of general partners,” First Super’s chief executive Bill Watson tells Investment Magazine.
“There were a number of issues that arose with the underlying investee companies in a number of the pools. One was Aero Care, which was baggage handling and airside support services company that’s operating in airports all around Australia and another was Rockpool Group.”
The fund found ESG risk was managed better under a direct-ownership model. “In 2016, we put our program on hold because we were not convinced that we could manage the ESG risk with the then arrangements with the way that we wanted to invest. We said all right, we’re going to invest directly,” Watson says.
First Super’s direct investment PE strategy focuses on mid-sized companies in the Australia and New Zealand capitalised at between $50 million and $100 million. It is working with 10 to 15 managers in the mid-market space with Stafford Capital. The fund has allocated $260 million or 7.6 per cent of assets to private equity and is invested in 15 businesses – one in New Zealand and the rest in Australia.
“The thing about the smaller funds is the issue of size so the investment for us, because of our size, is much smaller,” Watson says.
But the mid-market segment has thrown up a diverse range of investment opportunities including first-generation owners he says. “What it does mean for a small fund is, given the nature of businesses in Australia, we have got more choice.”
“We’ve also got better opportunity and more choice to invest in founder-based businesses that are looking to exit in the next five years.” The strategy has also is also cheaper than the previous arrangement.
While First Super has a sizeable allocation to private markets and PE, it has not made a strategy asset allocation change to increase exposure as public markets continue to be volatile. “We would not be allocating more in private assets. The only reason we would increase our share now is if a fund merged with us and we needed to deploy [capital],” Watson says.
“Our private equity program is basically we recycle what we get back and we’ve got various stages of maturity with the program, so it’s just a recycling.”
First Super is currently underweight equities and fixed income and overweight cash and is waiting to reinvest into public markets at the appropriate opportunity. “In terms of our dynamic asset allocation, we’ve taken a fair bit of money away from public markets and that’s Australia and then international equities and we’ve just held that in cash,” says Watson.
“We want to redeploy the surplus cash back into public markets when it’s appropriate to do so.”
But the increase in cash holdings has not drastically impacted returns due to the increase in deposit rates. “Being overweight cash means that we haven’t lost as much,” he says.