Despite a slowdown in private equity transactions and challenges in exiting funds, liquidity from recent mergers has given the $32 billion Brighter Super plenty of confidence to build out the asset class allocation to around 5 per cent of the portfolio.
Following Brighter Super’s FY24 performance, which saw a 9.07 per cent return for its MySuper option, chief investment officer Mark Rider says private equity is a part of the fund’s effort to prepare for potential economic shocks in the upcoming years.
It is targeting a 15 per cent return in the private equity part of the portfolio, with a focus on mid-market buyouts and minimal exposure to venture capital or growth.
“What’s been driving that increase in [private equity] allocation we’re making is actually coming from MySuper… the reason why we’re doing that is because the MySuper fund is somewhat simpler in its construct and it’s lower fees,” Rider tells Investment Magazine.
“But what we believe we need to do is actually try and make the portfolio somewhat more resilient.”
That private equity increase is being funded by a decrease in Australian equities, which Rider says are prone to influence from a weak Chinese economy, Rider says.
“In recent years our portfolio has had an overweight [position] relative to say, some of our peers, on equities,” he says.
“What we’re doing with private equity, MySuper, and broadly in terms of infrastructure… is because we believe they’re going to provide something different to the portfolio.”
Private equity has seen a dealmaking slowdown with and some exit stress recently. According to a report by consultancy Bain & Co, buyout deal values slid 37 per cent to US$438 billion globally in 2023, and unexited assets reached a record US$3.2 trillion at the end of the year, posing incredible liquidity strain for private equity firms to pay out investors looking for a way out.
But Rider says Brighter Super is not in a rush to ask for its money back.
As a result of its merger with the $6 billion Suncorp Super in 2022, which had significant liquid assets, the illiquidity of Brighter Super dropped from 30 per cent to around 22 per cent, Rider says.
“This is probably a good time to actually be able to look for [private equity] opportunities to invest in, being the one with the liquidity,” he says.
As an economist by training, and having started his career in the Reserve Bank of Australia, Rider has a keen eye on the broader macroeconomic environment. He says there is a high chance of a soft-landing, which likely will be beneficial for the financial markets, but it takes time for rates to fall and for growth to turn around.
“We have had a fairly broadly based slowdown in the world,” he says.
“I think there are always negatives to consider, but there are some positives there with rates coming down and the potential for the broadening of what we’re seeing in equity markets.”
The US election and geopolitical tension around the world will contribute to trends such as deglobalisation, onshoring and remilitarisation, Rider says, but tactically positioning the fund around those trends will be difficult.
“Part of the story on the US election, which we have considered as something to take on board, was that…the last 13 times an incumbent president has stood for re-election in the United States, the equity market has been positive, being well above the average of what you normally expect,” he says.
“But it’s quite hard to take any real definitive positions on the US election outcome.
“Probably one thing you can say is no one seems too keen on cutting the budget deficit at the moment the United States, so given how important that has been, that’s probably one thing which is working to hold growth fairly steady.”
