Cbus, one of Australia’s largest superannuation funds, will embrace overseas co-investments to help boost its private equity exposure.

Brett Chatfield Cbus
Chatfield: co-investments are an opportunity to drive returns and cut costs

The A$65.6 billion ($45.8 billion; €41.1 billion) pension, which invests on behalf of construction and building unions, expects to increase its 2 percent strategic asset allocation to the asset class as part of a portfolio-wide review that will conclude in June, deputy chief investment officer Brett Chatfield told Private Equity International.

Its current exposure is around 1.9 percent.

“At this stage, it’s most likely we wouldn’t reduce the other private markets,” Chatfield said. “We’ve got a bit of capacity to look for a bit more illiquidity from where we currently are, so most likely [the additional allocation] would be from the public markets and probably global equities.”

Co-investments will be key to this buildout, Chatfield said. The fund is in the process of selecting an overseas adviser to manage a dedicated co-investment mandate.

“Historically, we’ve been much more in the fund [of] funds space where you tend to get quite high fees… and less control over how and where you’re investing as well,” he added. “So, [we’re] really looking to build out the global side a lot through co-investments mandates where you can get attractive opportunities at a much lower cost.”

Cbus has cut overall investment costs by 41 percent – or A$410 million – since 2017 by expanding its in-house investment capabilities, according to a December statement. It now has about 120 internal investment staff managing direct strategies across equities, infrastructure and property.

Australian superfunds have traditionally been sensitive to costly asset classes due to stringent fee disclosure requirements that have left many – Cbus included – with private equity allocations in the low single digits. By comparison, Cbus has a 13 percent infrastructure allocation and 12 percent to property.

“Private equity is a very expensive asset class and that has constrained some funds, and it’s clearly part of the thinking in terms of our weight,” Chatfield said.

“Traditional funds do have some role. We do see more opportunity, though, to drive better returns but also lower costs in things like co-investment mandates. You still have to commit to reasonable fee loads and then you get performance [fees] associated with that – and that’s quite reasonable – but the overall level I think will come down quite a bit from what it’s been.”

The superannuation fund’s private equity build-out is spearheaded by Serge Allaire, who joined as private equity head from Australian wealth manager MLC Asset Management last year. Besides the offshore co-investment mandate, Allaire is tasked with internalising a portion of the domestic GP selection and co-investment processes and building new manager relationships overseas.

“The portfolio is a bit overweight to Australia historically because the advisers that we’ve used to start have done an excellent job,” Allaire said, noting that domestic assets represent about half of the portfolio.

“Now that Cbus has the dedicated resource in this space, we can afford putting a bit more emphasis to the international content, namely more in US and Europe. And so, over time, we intend to tilt it more towards international and [have] Australia coming down to around the 20 percent mark.”

Acquired tastes

The fund’s push into private equity comes at a time when industry giants are raising ever-larger funds – vehicles which hold limited appeal for Cbus.

“Money has poured to the more obvious places… the bigger funds, the large-cap investors,” Allaire said. “I don’t advocate that we at Cbus should play a lot on the large-cap end. It has its place in the portfolio construction, but it is a small component of the total portfolio.”

The bulk of its private equity commitments historically has been to small and mid-cap buyout funds. Moving forward, Cbus will continue to be active in this space, and will increasingly consider specialist GPs.

“Typically, in the healthcare sector, you see in Europe and the US a lot of founder-owners that are ex-doctors,” Allaire noted. “If you have a specialist PE manager that is run by ex-doctors as well, they connect much better than if you are a generalist… ex-investment banker or consultant that has no idea about the detail and intricacy of a sector. So, specialists have… an increasing importance in the broader portfolio.”

Strength in numbers

An aggressive merger policy means Cbus may soon have substantially more capital to deploy. It plans to absorb the A$6.4 billion EISS Super and A$5.9 billion Media Super funds this year in a bid to reach A$150 billion of AUM in the next five years.

“There’s a lot of consolidation going on in Australia at the moment, particularly small and medium-sized funds that are being merged into larger players, just given the economies of scale, the performance difference and the significant regulatory and government pressure,” Chatfield said.

The Australian Prudential Regulation Authority has been encouraging underperforming or smaller funds to merge with higher performers in recent years to improve results for beneficiaries and drive economies of scale.

“The big funds are really seeing that benefit as the Canadians have and the Europeans, of a reasonably significant internal capability,” Chatfield added. “That just gives you a huge amount of benefits, in addition to obviously cost reductions, which flow through to performance as well.”