You would be hard-pressed to find many investors comfortable with the colossal sums being raised by private equity’s largest firms. Stephen Whatmore, head of global private capital at Australia’s QIC, however, is one of the few quietly willing them on.

QIC was founded in 1991 to manage the Queensland Defined Benefit Pension Plan. As of last June, it had grown to more than A$92.4 billion ($68.8 billion; €63.1 billion) of assets under management, which it oversees for a range of government, domestic and global institutional investors, according to its most recent annual report. The global private capital programme, which began in 2005, accounted for A$7.3 billion, or almost 8 percent.

QIC’s private equity exposure is high by Australian standards. The average superannuation fund had allocated just 4.6 percent to the asset class as of 2020, according to Boston Consulting Group. This is, in part, due to legislation requiring them to be highly transparent around fees, which can act as a deterrent lest beneficiaries transfer to a more cost-efficient rival. The situation may improve in the coming years, however, with the average allocation expected to reach 7.5 percent by 2025.

QIC’s 115-strong investor base now includes a mix of Australian superannuation and defined benefit schemes, as well as an international asset manager and sovereign wealth fund.

“Over the last 10 years, we gradually brought third-party clients into the programme that we have built on behalf of the Queensland government,” Whatmore tells Private Equity International.

“So today, for our private equity business, about 60 percent or so of our capital is defined benefit plan and other strategy pools, and the remainder is third-party capital, where we’re also actively… building and enhancing that client base. It’s mainly superannuation types: the long-dated pension, superannuation money is perfectly suited for private equity.”

To date, QIC has largely invested this institutional capital alongside the Queensland government envelope in one combined portfolio. New clients have the option of buying in via a secondaries transaction, which also serves to provide liquidity for existing clients if necessary. Moving forward, however, QIC will offer clients different options depending on their risk appetites.

“We’re now at a position where we have a signal from some of our clients that they want to tilt into certain parts of the private equity market, and others want to tilt in other areas,” Whatmore says. “And that split often is between growth-orientated strategies… against buyouts or more sort of value-orientated strategies.”

“I wouldn’t want to say that what we do is ever easy… but we actually quite like the fact that large-cap private equity is so capitalised”

The composition of QIC’s private equity portfolio goes some way to explaining Whatmore’s enthusiasm for the frenetic pace of fundraising in the large-cap and mega-fund space. The institution predominantly invests from early-stage venture capital through to growth equity and mid-market buyouts. It is intentionally overweight in technology and healthcare.

“We’re really investing in the guy in the garage with an idea, through the companies that might have an enterprise value in or around $750 million,” Whatmore says. “We think that smaller companies really can respond to the influence of focused private equity ownership in terms of accelerating growth [and] improving their competitive positions in their markets. We essentially look for investments that will generate for us 500 to 1,000 basis points over the public markets in the long run.”

QIC’s private equity portfolio has delivered a 17.4 percent annualised return since inception, representing a 743 basis-point margin over the public markets equivalent, according to the institution’s annual report.

Private equity’s stellar performance over the past 12 months has only increased investor appetites for the asset class more broadly. Fundraising hit new heights in 2021, and funds continue to return to market more quickly and with larger targets.

“We’re seeing the same time pressure with small-cap managers,” Whatmore says. “And the answer to that is you just have to be out ahead of it. You have to be doing your homework very actively on your portfolio, such that when they’re coming back to market… with short, truncated time frames, you’re shovel-ready to confirm that diligence one way or the other.”

Mega-funds in particular are making hay. There were at least 18 private equity funds seeking $12 billion or more as of 31 March, according to PEI data. Though this dynamic has led to fears in some corners of a knock-on effect on pricing and returns, Whatmore views the resulting surplus of capital as a net-positive for QIC’s venture and growth-orientated portfolio. “The capital that’s flooded into the market over the last couple of years has tended to flood into large-cap or mega-cap sectors – so firms that are raising $5 billion funds or more and are buying companies that are above our target range,” he says.

“The acquisition multiples are high and historically very robust. I wouldn’t want to say that what we do is ever easy… but we actually quite like the fact that large-cap private equity is so capitalised and has a fair bit of pressure to deploy that capital, because it gives us another channel to sell into.”

Holding on

Participating at an earlier stage in the company life cycle can leave investors concerned that there is still room for growth when the asset graduates from their portfolio. GPs are increasingly turning to the secondaries market in these situations to extend their exposure by moving the asset – or assets – into a continuation vehicle and giving LPs the option either to roll over or sell out.

“There is a category of private equity-owned business that can continue to build value,” Whatmore says. “I think a lot of those investments are going to prove successful and the ‘second bite of the cherry’ investors will be well served. We’re interested in those opportunities ourselves because we do see really good companies leave our portfolio, we think a bit too soon. We’ll have made good money out of them, but it’d be nice to hold them for longer.”

“We want to be on the front line when opportunity happens… We get to see essentially the cooking of the meal before it’s produced”

At least one-third of the top 50 GPs in the PEI 300 ranking of biggest industry fundraisers had used continuation vehicles as of December, according to estimates by PEI and affiliate title Secondaries Investor. GP-led secondaries deal volume hit $63 billion globally in 2021, per Lazard’s Sponsor-led Secondary Market Report, up from $30 billion in 2020. Single-asset processes emerged as the most popular type of GP-led deal last year, accounting for 52 percent of sponsor-led deals.

“We have been a bit more of a seller [and] that’s been partly through scarcity of capital, but we have a number of conversations going, in and around our portfolio, at the moment in terms of continuation and opportunities that we likely will be a buyer into,” Whatmore adds. “It really depends on the company, the pricing, the transactional dynamic, but it’s an opportunity set that is very interesting and we’re looking at very actively.”

QIC’s checklist for rolling over into a continuation fund includes: whether the business has the potential to grow from a $1 billion valuation to multibillion; whether it has capacity for geographical expansion regionally or internationally; and whether the management team is skilled enough to expand the capture of its current product set or service offerings.

“All that needs to pencil out to a return expectation that is very comparable to our underlying… cost of capital,” Whatmore says. “We had one [recently] with a manager that had received very full pricing for a company that [it] wanted to build a continuation vehicle around. We looked at that company and we thought: that’s fair value. We didn’t share the manager’s optimism around the future prospects for the business, and we were happy to not roll into that new vehicle.”

Sharing the load

Like many institutions investing at scale, QIC has leaned heavily into co-investments, closing 10 such deals between June 2020 and 2021. The strategy now accounts for roughly half of all capital it deploys to private equity each year, and has generated a 27 percent IRR and 3x money multiple on realised investments since inception.

“Co-investing and direct investing alongside our partners has been a very valuable part of the programme,” Whatmore says. “Today we’re looking to put essentially 50 percent or a one-to-one relationship between co-investment capital to fund capital to work, and at times we’re able to achieve better than that.”

Co-investing has remained popular across the board in recent years as investors look to drive cost efficiency and supercharge their returns, with almost two-thirds (64 percent) planning to invest directly alongside their GPs this year, according to PEI’s LP Perspectives 2022 Study.

Doing so can be easier said than done, however. Respondents to PEI’s survey identified staffing requirements (45 percent), the speed of such transactions (42 percent) and a lack of available opportunities (32 percent) as the biggest hindrances to co-investing. This dynamic can put more sophisticated institutions at an advantage when competing for co-investment opportunities.

“We’ve refined our approach and our strategy and our execution capabilities around [co-investing],” Whatmore notes. “We have worked hard over time to really position ourselves as a capital partner to our GP partners globally, so we really want to be first called when they need additional capital into an opportunity, and co-underwriting is part of that.”

Co-investment co-underwriters are traditionally few and far between because the execution, resource and investment requirements for these opportunities can be much higher.

“We will carry our fair share of deal costs or broken deal fees,” Whatmore says. “We want to be on the front line when opportunity happens, and that not only positions ourselves well and helps access, but we get to see essentially the cooking of the meal before it’s produced. So if you can run alongside your partners and participate in diligence and really understand how their assessment of an opportunity is being worked out [in] real time, that’s actually a much richer seam of information and better alignment, we think, for making that investment successful.”

Venturing abroad

QIC’s global private capital unit employs 16 professionals in Brisbane, San Francisco, London and Copenhagen. Though North America accounts for about 50 percent of its portfolio, the institution’s disproportionate appetite for technology has also seen it build a more substantial exposure to China – which boasts a massive growth and venture capital market – than many of its Western peers.

“[Our China exposure is] about 23 percent to 25 percent today, depending on the client portfolio,” Whatmore says. “And fundamentally, our strategies in China have been very growth-orientated – they have tended to have a technological or digital enablement as part of the companies that we invest behind and their business models. It’s been a very fertile area for performance.”

China was rocked last year by a wave of regulatory actions in sectors much beloved by private equity investors. These rules included a ban on private tutoring companies making a profit through teaching core school subjects and raising capital, and new data security laws expanding restrictions on the cross-border transfer of Chinese data without permission.

“The last year has been difficult,” Whatmore says of China. “We had some exposure to companies that had a large data component to their business, and they’ve taken a hit. Education, not so much. For those companies that did experience that, we think that at the end of the day, they remain fundamentally well-positioned businesses.”

Some investors have shied away from China until there is more clarity around the regulatory environment, making fundraising a challenge for domestic GPs.

“I think at this stage, we don’t see [us] changing our settings there – we’re thinking that through, to be honest,” Whatmore says. “It is a very vibrant investment market for private equity and private capital strategies; the entrepreneurialism in China is a genie that’s out of the bottle and will not be going back in the bottle. It remains an interesting destination for capital, but it’s one where I think a lot of investors [are] sitting back and thinking about, I suppose, the risk overlay that they apply to China.”

Europe, which also has a burgeoning technology and venture scene, is one area QIC has become more active in over recent years.

“We’re moving from… 20 percent up to 25 percent invested in Europe, where we see really interesting opportunities today,” Whatmore says. “It’s tended to be a part of the portfolio where we focus more on buyout strategies rather than venture capital or growth. But our experience in Europe… has said that the early-stage sector in Europe is really [coming] through and has become a very interesting, vibrant part of that market, and we’re seeing the emergence of very interesting venture capital firms.”

European and Israeli start-ups raised €102.9 billion last year, up nearly 120 percent on the prior year, according to PitchBook. Deal count also reached a new record with an estimated
10,583 transactions.

Pretty green

Private equity’s buoyant returns and frenetic capital raising have proven a headache for many Western investors – in particular, for US public pensions with strict allocation targets. Organic growth in their private equity holdings combined with the quantity and scale of re-up opportunities on their desks has left some overexposed and needing either to slash ticket sizes or decline altogether. QIC is “working hard to find the capital” from new clients to accommodate every attractive opportunity coming its way.

“We’ve never missed anything in regard to resources, I’m pleased to say, because that’s a very unfortunate way of missing out on opportunities,”
Whatmore says.

“I think it’s fair to say at the moment we are under-capitalised for our opportunity set… If I think about the last two or three years of our investment activity, we’ve really left hundreds of millions of dollars of excess opportunity on the table where we could have scaled up into either a co-investment [or] we certainly could have taken up bigger positions in the underlying funds that our managers are bringing to us.”

Newer strategies like impact investing could be beneficiaries of whatever additional capital QIC is able to source.

“We haven’t ourselves launched an impact strategy; I suspect that’s probably around the corner for us, because I think that market and that theme actually plays quite well into parts of our portfolio,” Whatmore says.

He adds that any such investments would likely be held independently of QIC’s main portfolio.

“Just given its nature, it would be a separate opportunity where… we would be directed by clients as well. I think this is something where we would see a… collaboration exercise with clients, but I think it is a separate strategy and it would warrant [a] standalone structure framework.”

ESG more broadly, on the other hand, is “front and centre” in QIC’s private equity investment processes. The institution became a signatory of the UN-backed Principles for Responsible Investment initiative in 2008, and actively seeks to improve ESG communications in its GP relationships and wider LP base, according
to its website.

“As it relates to our relationship base in the private equity sector, I think it’s fair to say [ESG] lags a little bit [behind] other asset classes… particularly around data capture,”
Whatmore says.

“Private equity portfolios are very diversified, there are lots of underlying companies [and] it’s global in nature, so data capture is a more challenging aspect of ESG monitoring.

“We survey our private equity managers on an annual basis around their policies, their approaches to data capture, their decision-making processes and outcomes around these two practices, and we’re seeing a very steady improvement right across our portfolio in that regard.”

Whatmore’s path to the top

Stephen Whatmore joined QIC’s global private capital team in 2008. Prior to his current role, he established QIC’s GPC office in San Francisco and led the North American team, investing across all private equity strategies, including venture capital, buyouts, secondaries and co-investments.

Previously, Whatmore was head of global private equity at Australian superannuation fund MLC and led the execution of a globally diversified private equity strategy. He is involved in the Institutional Limited Partners Association, where he was previously vice-chair and a member of the Industry Affairs Committee.

This article has been updated to reflect that Stephen Whatmore no longer sits on the Institutional Limited Partners Association’s Industry Affairs Committee.