Future Fund: Australia’s SWF anticipates a shake-up of PE firms

The sovereign wealth fund’s chief executive Raphael Arndt expects the macro environment to separate the wheat from the chaff among GPs.

Private equity firms young and old have had a pretty good time of it in recent years. Rampant LP appetite has driven assets under management to new heights, while returns, supported by a decade-long bull market, have left many an investor well rewarded.

Now, as global markets seem destined for a recession, Future Fund – Australia’s A$241 billion ($165.2 billion; €164.9 billion) sovereign wealth fund – is expecting a bifurcation between managers that are genuinely capable of organic value creation, and those that have perhaps coasted on the back of these macroeconomic tailwinds.

No more money for old rope

“If we start with private equity… it’s been pretty easy to make money for the last decade, as economic growth post the financial crisis has been more or less sustained, other than during 2020,” chief executive Raphael Arndt said during a media briefing in late August. “So, if you’re a private equity manager, or levered private equity manager, or even if you’re a venture capital manager competing to back businesses which are similar to ones that have taken off on listed markets, then it hasn’t been that hard to make money. That environment is changing now.”

Arndt added that economic growth had become a headwind, in part due to geopolitics and fiscal policy, with the cost of debt rising and liquidity being withdrawn through quantitative tightening. 

“So, we think there will be a shakeout that’s already started between well-credentialled, highly capable managers who have… demonstrated [the] ability to add value through their skill and have done that for some time and through cycles, and newer managers quite often who have really been sailing with the wind at their back,” he said. “And we’re very focused on the quality of our portfolios and ensuring that we continue to have access to the best managers in the world.”

Future Fund, which during the pandemic proved itself one of PE’s most prescient investors by proactively selling a portion of its portfolio to free up cash, had an 18.2 percent actual allocation to the asset class as of 30 September.

Its emphasis on prioritising GPs with genuine value creation chops echoes a recent Private Equity International guest commentary from Professor Oliver Gottschalg of MJ Hudson’s Fund Performance Analytics team, who believes LPs should pivot from a historic focus on top-quartile firms to those that can demonstrate outperformance and sectoral expertise relative to their direct peers.