Private equity is poised to have a more significant role in Australian industry funds’ portfolio construction as the options for assets which can deliver strong returns continue to shrink.
Within days in June, HESTA and the smaller First Super committed $470 million between them to a global fund manager, Stafford Capital Partners, to invest in private equity.
HESTA has mandated Stafford to co-invest $250 million on its behalf into deals with firms such as Quadrant Private Equity and Arcadia Capital over three years.
The Melbourne-based industry fund has invested with Stafford, now under the chairmanship of Brett Himbury, former Chief Executive Officer (CEO) of IFM Investors, for more than a decade.
HESTA’s previous $200 million global private equity (PE) co-investment mandate, known as “QP3”, was fully invested in three years and has since inception in 2011 generated strong risk-adjusted returns.
Co-investments have been made alongside leading global private equity managers into companies operating in a diverse range of industries – including healthcare technology, cyber security, sustainable packaging and financial payments.
At the time of the commitment with Stafford, Jeff Brunton, Head of Portfolio Management at HESTA, said continued development of the relationship with Stafford demonstrate how the fund is looking to collaborate with key investment partners.
He says the fund sees the co-investment vehicle as effectively an incubator for ideas around certain thematics, providing valuable perspectives around expertise and successful businesses that can lead to further deal flow.
“This is a great example of how we’re looking to leverage cutting-edge thinking from across our ecosystem of investment partners, helping generate ideas and innovation across the portfolio,” Brunton says. “It’s this total portfolio approach that’s effectively bringing the best global investment thinking to our decision-making, which helps us continue to deliver strong, long-term investment returns for members.”
Daniel Bowden, Australian Private Equity Lead at Stafford, says the strategy seeks to open smaller deal sizes, providing access across a wider spectrum of the private equity investible universe. Single-asset style continuation vehicles, where HESTA represents long-term patient capital, are also an area of focus.
As a large institutional investor, HESTA is looking for investment opportunities of appropriate scale that can be efficiently executed.
Ironically, it is HESTA’s own size that can be a deterrent when trying to access potentially strong-returning smaller deals on its own. Through Stafford, it has been able to access and complete a number of smaller strong-return deals. The manager has set up QP4 to deploy the latest mandate on behalf of HESTA.
At June 30, 2023, HESTA had some $3.9 billion invested in private equity.
Long Term Partnerships
At the other end of the spectrum, the $4-billion First Super is also pursuing alpha returns from investment in PE. First Super, however, is not a novice either; it has been investing in PE since 2010.
In its PE strategy, First Super has moved from a fixed term fund arrangement to an evergreen model – and has injected fresh capital of $220 million. Stafford continues to co-invest with First Super under an open-ended mandate. Stafford’s original PE program with First Super, which has been operating for 14 years, has generated a net IRR of more than 20 per cent each year since inception.
The new program means that proceeds received from exits will be reinvested into new co-investment opportunities. The capital will go into small-to-medium-sized Australian companies forecast to generate strong returns alongside co-investment partners. This is exactly where First Super wants to be, supporting the Australian economy rather than investing in offshore private equity.
Stafford has worked closely with First Super for several years to develop a specialised ESG diligence framework which continues to be applied to the co-investment program.
Private equity and particularly early-stage venture capital have not been asset classes that figure prominently on the minds of super fund investment committees.
With the collapse of the commercial property market and high barriers of entry to infrastructure, PE offers an alternative alongside private credit to super fund investors seeking to maintain high returns to members in a climate of high interest rates and economic uncertainty.
The change of emphasis is reflected in the appointment of dedicated executives to run PE units. The largest super funds now have a team driving their PE strategies.
As an example, the Future Fund, which led the shift into PE at least a decade ago, last year hired David Bluff to head its private equity team. Bluff was previously a partner and managing director of the global investment firm, The Carlyle Group, and has strong global connections.
Future Fund’s more recent allocation to PE has been around the mid-teens from under 10 per cent a decade ago. In 2014, PE allocation was 8.8 per cent against 5.6 per cent for property. PE spiked at 17.5 per cent in the June quarter of 2021, when more than $34 billion was invested in the sector. Property remained roughly at the same level of 5-plus per cent during that period.
The Future Fund’s PE number has been trending downwards since its peak, and by December 2023 had shrunk by $2.85 billion from the preceding quarter. The change in PE exposure is blamed on currency and return movements.
Following close behind the Future Fund – and aiming to catch up fast – is AustralianSuper, which has set a target to double its exposure to PE over the next four years.
Although AustralianSuper declines to comment on its PE allocation, in a recent interview with Bloomberg, Mark Delaney, Chief Investment Officer at AustralianSuper, flagged the fund’s intention to invest in more PE deals over the next four years. By his reckoning, AustralianSuper’s PE holding would reach around $35 billion as it seeks to boost its PE allocation to as much as 9 per cent. Currently, its allocation to PE is around 5 per cent.
Moving Overseas
Terry Charalambous, Head of Private Equity at AustralianSuper, now works from New York, where he has been based since 2022. His relocation was strategic: to be in the universe of global PE deals. Speaking to [i3] Insights two years ago, Charalambous said that to help implement the fund’s strategy its US-based private equity team would grow to 20 members over the next few years.
With boots on the ground, and by strengthening relationships with well-aligned investment partners, the fund expects to source ‘more compelling long term investment opportunities’ to grow its PE exposure. AustralianSuper’s approach is to invest in general partner funds, alongside GPs in co-investment and in co-underwriting opportunities.
Aware Super currently has already around $10 billion invested in PE. Jenny Newmarch, Head of Private Equity at Aware Super, is now based in the fund’s London office, where she is tasked to grow the fund’s PE portfolio. She was relocated to London to build a local team to source private equity deals. Part of the rationale of opening a London office is to reach more deeply into private markets in equity investments in the UK and Europe.
Rest Super has also foreshadowed its intention to significantly increase PE investment. Andrew Lill, Chief Investment Officer at Rest, has indicated that the fund’s PE allocation will be lifted to 5 per cent by 2026. Rest has been actively growing its private equity holdings – up from 1 per cent in 2021 to 3 per cent today.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.