To completely annihilate a famous quote by Winston Churchill (for which, apologies): “Never has so much been offered to so many with so few pools of capital”. According to anecdotal reports, limited partners in Australia are astonished by the range and volume of international private equity funds currently trying to attract investment. The quality of some of those doing the parading is also an eyeopener – among them, for example, are several of Silicon Valley's venture elite. Locally, they are described as “glamour funds” (who says Aussie humour lacks subtlety?).
Beyond the identity of the fundraisers, however, is another reason for LP bafflement: namely, why are these GPs gravitating to Australia? The Australian LP response to this question would probably be a shrug of the shoulders – perhaps followed by the observation that they have been seriously misinformed. After all, the Australian Superannuation funds – unsurprisingly the main recipients of GP ardour given their sheer size – have all of the private equity allocation problems associated with their pension peers globally, as well as one or two more all of their own.
The denominator effect is, of course, one of the globally shared problems for any pension with a mature equities portfolio. Australian pensions have certainly not been immune from this problem. However, to compound the effect, Australia has seen a massive currency decline – the Australian dollar fell from 97 cents against its US equivalent to 62 cents in a mere four-week period. Furthermore, liquidity has been hit by the fact that the majority of Australian pension schemes are defined contribution in nature rather than defined benefit. This means that members have the ability to switch in and out of investment strategies – and have, en masse, been deserting “growth” and “balanced” options in favour of cash.
The upshot of this, points out Les Fallick of Sydney-based placement agent Principle Advisory Services, is “far less liquidity for pension funds to put into the market”. He estimates that, since the recent fundraising heyday, the quantum of capital they have available for investment in new funds has fallen around 75 percent. Furthermore, it should not be assumed that the remaining shrunken pool will trickle into new primary funds. Instead, much of what little is being invested in new opportunities is finding its way into the many secondary interests currently being touted around the Australian market.
Fallick has his own theory on why GPs continue to jet into Sydney with high hopes – in the face of all the available evidence that they will probably end up completing the return leg of the flight empty-handed. He says: “A lot of people think that, even when the Middle East comes back, it will not be the happy hunting ground that it used to be. Plus, parts of the North American LP community will not be returning to private equity any time soon. They want to diversify their investor base and they see Australia as the place to do that.”
Unfortunately, the curse of unrealistic expectation is increasingly apparent. Says Fallick: “Those who come here to raise money will have to take a long-term view. Even before the financial crisis and economic downturn, the average decision-making time for an Australian pension to make a commitment was six to eight months. You now have GPs saying ‘we only want $1 billion and we want it by August’. My advice is ‘dream on’.”
Beyond short-term expediency, there are concerns that Australian pensions may end up less committed to private equity in the long term. It's worth remembering that, until 2005, private equity investing in Australia was small-scale. From 2005 to 2007, the market exploded – and many of those institutions that ramped up their private equity allocations during that period know they will emerge from the current wreckage severely burned. As a result, it is reported that many of these institutions are having a fundamental rethink of their asset allocation strategies – processes that may result, some think, in reduced private equity allocation targets in future.
This may be a concern for those raising private equity funds in the future. Today, the concern is that the reality of raising capital in Australia is not matching the perception. Even the glamour funds are finding it hard to make themselves attractive.