MLC Asset Management’s approach to private equity focuses on finding resilient and recession-proof businesses in the low and mid market segment. Florence Chong speaks with Rachel Lockyer about recent landmark deals, how to identify key managers and technological disruption.
MLC Super’s private equity (PE) team was quick to spot an opportunity when one of its private equity managers, Next Capital, bought NZ Bus, a New Zealand bus company, operating in Auckland, Tauranga and Wellington, from Infratil for NZ$130 million in 2019.
The investment yielded a 69 per cent internal rate of return (IRR) when Next Capital sold the business to Kenetics NZ Holdings for about NZ$400 million, netting the Sydney-based private equity firm and its co-investor 4.1 times their investment.
Next Capital achieved the return through a ‘complex operational improvement’ to turn the business around, Rachael Lockyer, Head of Australian Private Equity, MLC Asset Management, says in an interview with [i3] Insights.
We looked at the business plan, and the management team that was going to be in place for NZ Bus and we felt comfortable, that from a co-investment standpoint, the business had been derisked
Despite increasing the wages of its drivers, the bus company’s pre-tax earnings rose from about NZ$18 million to NZ$45 million. During that time, it extended contracts with local councils, and it received council support to roll out 152 electric buses over 4 years, transforming the diesel fleet to electric vehicles which would reduce NZ’s carbon emissions by 10,000 tonnes per year.
At the time, NZ Bus operated a fleet of 720 vehicles in the three cities.
“Next Capital had done two bus deals – and both of them delivered exceptional results. So, when they came to us with NZ Bus, their third bus deal, having already delivered almost three times the money on the two prior bus deals they did, we did not hesitate (Next Capital had previously acquired and sold Forest Coach Lines in Sydney and Go Bus in New Zealand),” Lockyer says.
“We looked at the business plan, and the management team that was going to be in place for NZ Bus and we felt comfortable, that from a co-investment standpoint, the business had been derisked.”
Seeking Resilience in Lower-to-mid Markets
While the NZ Bus deal might stand out for its outsized return, this was not unexpected from the MLC PE team, which seem to have an eye for the right investments.
Since 2007, when it committed to its first co-investment, the PE team has delivered consistently for the MLC super program more than 15 per cent net IRR year after year.
The consistency of its performance has earned it the moniker ‘the golden egg’ – earning the respect of its colleagues and peers in the industry.
Today, not only does the PE team invest for other divisions of the organisation, but it also handles investments on behalf of other global institutions.
Along the way, MLC has changed ownership. For two decades, it was owned by National Bank of Australia (NAB), which bought it from Lendlease in 2000. NAB sold the business to IOOF in 2020, which has since been renamed Insignia.
The MLC PE portfolio totals almost $5.9 billion. It invests for the group partly through the MLC Global Private Equity Fund and partly through a series of co-investment funds. The first co-investment fund was launched in 2013 and raised $51 million. Subsequently, two other funds followed, raising $165 million and $157 million respectively.
“Now we’re raising Co-Investment Fund 4, aiming for a close in line with Fund 3, but we haven’t finalised the target. We’ve had a lot of interest from our existing investors,” Lockyer says.
A team of nine operates out of MLC’s offices in New York and Sydney to source and select investments. “Typically, we look at around 100 co-investment proposals a year and select around 10 per cent of these,” she says.
Now we're raising Co-Investment Fund 4, aiming for a close in line with Fund 3, but we haven't finalised the target. We've had a lot of interest from our existing investors
Approximately 20 per cent of the portfolio is dedicated to venture capital with the balance deployed on mid-market buyouts.
“About 21 per cent of our mid-market buyout portfolio is in technology and software, then about another 20 per cent in healthcare and another 20 per cent in consumer. The rest is invested across a variety of industries.
“We have specialist managers who have worked in those sectors for a long time, they know a good investment when they see it,” she says, adding that the group’s in-house expertise comes from team members who are specialists in software, healthcare and consumer and/or were former engineers.
Lockyer says the key criteria is resilient and recession-proof businesses in the lower-to- mid-market segment of the PE world. MLC is largely sector agnostic with a portfolio including high-tech, industrial and consumer companies.
The portfolio, including the MLC Global Private Equity Fund, invests in some 2,400 underlying companies, of which 50 per cent are US companies, about 30 per cent European, and the remaining 10 per cent divided between Australia (6 per cent) and Asia (4 per cent).
In 2024, the MLC Global Private Equity Fund delivered a 20 per cent net return, ahead of its peer group, according to Morningstar.
Finding the Right PE Partners
The choice of manager plays a role in its success. Lockyer says MLC invests only with ‘top quartile’ managers and keeps a tight list of around 20 firms. Its long-term relationship with these managers gives the MLC team access to co-investment opportunities.
“We have a lot of specialists that we’ve been backing for years in technology and software, healthcare, some resilient consumer and just general industrials,” she says.
Lockyer says the funds run by these managers are keenly sought after. Some funds are now in their fourth or fifth iteration and have strong performance track records to back them. “It is difficult to get into these funds without first establishing relationships with the managers. We have been backing them for decades,” she says.
“Given the level of geopolitical risk and macroeconomic uncertainty, diversification of PE investments across geographies, managers, and sectors is important to get you through the tough times.”
There are going to be a lot of winners in AI, but they are going to be the large companies. These are spending by far the most to keep up, and software firms in the mid-market have got to keep up
The portfolio stood the test of the COVID pandemic, with the private equity return for MLC Super delivering 60.4 per cent in 2021 and outperforming the benchmark MSCI by 40.2 per cent. This was in part because companies were chosen for their resilience to economic cycles.
“And of course post-COVID you get hit by high interest rates, and cost of living pressures. We’re careful with that and any other kind of existential risk, like AI disrupting business models.
“There are going to be a lot of winners in AI, but they are going to be the large companies. These are spending by far the most to keep up, and software firms in the mid-market have got to keep up,” she says.
Technological Disruption and the Impact of AI
Mindful of the impact of AI, Lockyer adds: “That’s something we’re obviously careful of with new investments going forward.”
She also offers the observation that increasingly, some businesses feel more infrastructure-like – but they have a private equity upside. “So that blend between infrastructure and PE is quite relevant. Healthcare has been classified as infrastructure more recently, and we also have had some great historical success in data centres and logistics. These businesses are underpinned by long-term contracts.”
On the impact of the change of government in the US, Lockyer says: “We really like localised strategies in developed markets. That really fits into well within the lower mid-market and mid-market in which we play. We know when investing in these smaller businesses, with their local supply chains servicing local end markets, that impact from international tariff changes should be relatively minimal.”
“We don’t have to change our investment strategy. We continue to do what we’ve always done. We always take a relatively conservative approach when we invest in private equity,” she says
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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.