Australia’s Future Fund boosts exposure to China

The A$123bn Australian sovereign wealth fund says it is growing its private equity investments in Chinese businesses positioned to benefit from the country’s rising middle class, as the fund seeks to beef up returns in an otherwise low-yield environment.

Raphael Arndt, the chief investment officer of Australia’s A$122.8 billion ($92.5 billion; €82.9 billion) sovereign wealth fund the Future Fund, said the fund aims to capitalise on business opportunities set to benefit from China’s middle class consumption, amid slower global economic growth.

“The fund has recently been increasing exposure to onshore Chinese strategies where it can access the ‘New China’ opportunities being generated by an emerging middle class such as in healthcare, tourism, agriculture, and internet-enabled retail,” Arndt said during the Australia Venture Capital and Private Equity Association Alpha Conference held earlier this week.

He added that these trends are not accessible through public equity markets, which are “heavily tilted to the ‘Old China’ sectors of construction, manufacturing and state-owned enterprises.”

According to data from its 2015 annual report, Future Fund invested in Beijing-based CDH Investments, which counts among its holdings Henan-based pork producer WH Group and Foshan-headquartered home appliance company Midea.

The Future Fund, which on Tuesday posted portfolio updates as of June 2016, said it doubled in size since its inception 10 years ago, growing from the government’s A$18 billion seed capital to A$122.8 billion this year, “purely on the basis of investment performance”.

It delivered a strong 4.6 percent final-quarter performance and a 7.7 percent return per annum over the last 10 years, driven by a “more prudent approach to balancing the risk and return requirements of its portfolio, taking on risk only where the returns justify”.

Private equity programme “more important now than it has ever been”

The fund’s private equity programme, which according to Arndt is “more important now than it has ever been,” especially in a lower return environment, now comprises around A$12.8 billion or 10.4 percent of the fund, a marginal decrease compared with last year’s 10.8 percent. More than half of that is invested in venture and small Australian companies. Of the capital in the fund’s private equity programme, around 25 percent is in co-investments.

In terms of geographic exposure, about 60 percent of its private equity programme is invested in the US, 30 percent in Europe and the UK, and 9 percent in emerging markets such as China and India. The Future Fund does not report a separate figure specifically for its China exposure.

The Future Fund’s private equity team, led by Steve Byrom, has mainly invested in the funds and investments of global private equity firms, including Boston-based Bain Capital and London-based Apax Partners. The fund also has commitments with local managers such as Quadrant Private Equity, Archer Capital, and AMP Capital.

Arndt also cautioned fund managers that the fund will continue to scrutinise fees closely and “will not pay for luck or any lazy use of leverage”, adding that the focus on fees and terms between GPs and LPs is only likely to increase.

As at the end of June 2016, the fund has invested about 6.3 percent in Australian equities, 22.5 percent in global equities, 7 percent in property, 6.7 percent in infrastructure and timberland, 33.3 percent in cash and debt securities, and 13.7 percent in alternative assets (assets not covered in the above-mentioned categories).

The Future Fund has returned an average 7.7 percent per annum net of all fees and costs, above its target return of 6.9 percent, and has more than doubled the original contributions of A$60.5 billion.