The Your Future, Your Super reforms have caused TelstraSuper to review its allocations to private markets. Florence Chong speaks with Kate Misic about the changes
For as long as it has been investing on behalf of its members, TelstraSuper has followed the tried and tested formula of picking core assets for the bulk of its private market portfolio, whether real assets or private equity.
The approach has served its members well over the decades. Its choice of assets and calculated weightings to different sectors saw the portfolios come through the COVID downturn pretty much intact.
Then came the Your Future, Your Super (YFYS) legislation, mandating annual performance tests on super products against what the Australian Prudential Regulation Authority (APRA) described as ‘a clear, legislated performance benchmark’. The test includes an assessment of investment performance and administration fees.
This has meant a recalibration of TelstraSuper’s portfolio construction and investment strategy – looking beyond core returns to take some risks to obtain higher returns from value-adding opportunities and investment in the private markets.
“We are doing a slow and careful rotation from core, taking some value-add risk in certain places,” says Kate Misic, Head of Alternative Investments and Real Assets at TelstraSuper. Since taking over the role in 2010, Misic has overseen the fund’s investments across real estate, infrastructure, private equity and venture capital (VC) and opportunities.
The YFYS performance benchmarking is the reason for selectively seeking better returns from value-add opportunities in unlisted infrastructure, Misic says.
One example is its recent investment in Net Zero Power Fund, managed by Quinbrook Infrastructure Partners, which looks to invest in utility-scale solar farms, battery storage and sustainable data centres.
The asset includes an interest in Quinbrook’s Supernode battery project and sustainable data centre campus, located north of Brisbane. On completion, the $2.5-billion project will be one of the largest data storage campuses in the southern hemisphere.
Since YFYS benchmarks came in, we have stepped up our exposure to value-add infrastructure projects and development. We are willing to take more risk in pursuit of higher returns
“It is fair to say that we have been growing our allocation to infrastructure slowly, we are not in too much of a hurry,” Misic says. “But there is something to say about infrastructure. First is that our infrastructure assets have typically always been core – or what would be called super core in the US.
“Since YFYS benchmarks came in, we have stepped up our exposure to value-add infrastructure projects and development. We are willing to take more risk in pursuit of higher returns.”
TelstraSuper has, in fact, been investing in the value-add and opportunistic space for at least eight years through its private market allocation. Its investments in renewable energy and data centres have delivered “outsized” returns.
“Philosophically, I really like private markets for a number of reasons,” says Misic. “I love the pure aspects of value-add. It is a place where our members are exposed to innovations which can be part of trying to solve some of the world’s intractable problems. It is where you add value by creating companies and employing people.”
Some of TelstraSuper’s investment in cutting-edge ventures include fusion power technology, carbon capture, and renewable landfill gas.
Misic says there is less correlation between venture capital and equities markets, except at exit when these business owners and their backers seek to exit through initial public offerings or mergers and acquisitions.
“Companies start up all the time, so do ideas,” she says. “They come along constantly, and this is where investors can find long-term sources of return less correlated to the equities market.
“If you think about the equities market, these are existing shares that change hands between shareholders, with VC you are creating something from capital injection.”
Venture Capital
Venture capital allocations make up 25 per cent of TelstraSuper’s allocation to private markets (which is five per cent of its Balanced and Growth investment options.). The rest is traditional buyouts in the small-medium business world.
“A lot of businesses face generational change, or they are spun out of larger businesses. You see big avenues for the creation of value, professionalising the business or nationalising a business – whatever you are trying to achieve.”
Misic finds VC and buyouts interesting because each investment comes with different risks. With VCs, the obvious risk is business failure. With buyouts the risks are typically about leverage and achieving operational efficiency and synergies.
A key question is how much debt the business can take onboard and then whether it can produce sufficient growth in cashflow to keep up with the higher debt repayments. Interest rates may have peaked, but we are not out of the woods yet, says Misic.
She is conscious of the lurking risk of recession although she does not necessarily think there will be one. “This is the part of the portfolio you would be a bit more worried [about] if there is a recession.”
It is not possible to have a recessions-proof strategy,” she says. “It is, however, possible to single out assets that have inbuilt resilience.
“The best assets in times of uncertainty are those that can withstand changes and remain resilient through market cycles,” she says, adding that one way of ensuring this is to look for nimble, and experienced managers.
“For example,” she says, “we will partner with buyout managers who have shown they can add value through multiple levers, not just working with the capital structure of a business. It is not about stacking on leverage and using that as the only driver for value-add. Nor is it about banking on better multiples on exit; as you know, the exit market can change.”
We will partner with buyout managers who have shown they can add value through multiple levers, not just working with the capital structure of a business. It is not about stacking on leverage and using that as the only driver for value-add. Nor is it about banking on better multiples on exit; as you know, the exit market can change
Managers who have the skills to improve revenue growth, optimising costs and efficiency and even making leadership changes, are more likely to be the managers who can help ensure more resilient returns.
Having a long-term mindset is one way of hedging against market uncertainty because an investor is not able to move the portfolio significantly once the market is selling off. The option is to wait for the market to recover.
Misic says TelstraSuper’ co-investment programme is largely in late-stage venture capital. “We want to see companies that have reached a stage where they have customers or have gone past the stage of technology risk and have already developed a product. Typically, we are not co-investing in early-stage VC,” she says.
In private market investment, TelstraSuper has about 75 per cent of its assets offshore and the remaining 25 per cent in the domestic market.
Asked if lessons have been learned from investing in private equity or venture capital that may be worth recounting, Misic pauses, then says:
“I think one observation I recall from the hedge fund world is that these things work best when the liquidity in both the underlying assets and the vehicle that holds those assets is well-matched. When there is a mismatch – that is when things can get a little awkward. That is a good lesson learned to share.”
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