Australia: Where next for Future Fund?

What does Future Fund's private equity portfolio look like?  

Private equity makes up 10 percent of our whole fund or around A$11.5 billion ($8.6 billion; €7.5 billion). We invest through 28 external investment managers with a team of seven investment professionals in-house overseeing our managers and working with them to identify strategies and opportunities including co-investment opportunities.

Most of our private equity exposure – around 60 percent – is through the US, with sizeable exposure through Europe, UK, emerging markets and Australia. The venture capital and growth segment is significant at around 40 percent of the private equity portfolio with co-investments, buyout strategies and distressed opportunities each roughly around 2 percent.

How will it look different in five years' time?  

The Future Fund dynamically manages the whole portfolio, so the shape of the portfolio will depend on the opportunities we find across asset classes and what we find in the private equity space in particular.

That said, we continue to be attracted to the opportunities in innovation and small company growth in developed and emerging markets, including China and India, and particularly where bank financing and public market funding is constrained.

How much resource do you have in-house?  

We have seven investment professionals within the private equity team and could possibly add one or two people to that in a couple of years. The Future Fund has a 'one team' approach – meaning that people from across the organisation are expected to contribute to investment decisions including those outside their particular asset class. This means we can access the thinking and perspectives of people in our listed equity, infrastructure, property and credit and hedge fund areas to help us assess opportunities.

We also strongly believe in working in close partnership with our external managers and we see them very much as an extension to our internal team.

What are the major considerations when building an in-house team – what kind of talent is needed and what kind of KPIs should be set?  

We look for people who have the experience and capability to engage as equals with our general partners while having an appetite and willingness to think about the total Future Fund portfolio. Practically that means we have brought on people with a mix of private equity specific and investment management backgrounds. Right across the Future Fund people are not rewarded on the basis of the asset class on which they are primarily focused, instead all staff are exposed to the performance of the portfolio as a whole. That's a particular characteristic of our 'one team, one portfolio' model.

Is private equity an 'easy sell' internally?  

The Future Fund started investing in 2007 and private equity has always been expected to be part of the programme, with our first investments made in 2008. Our view is that it gives the portfolio a good means of accessing alpha, innovation and idiosyncratic growth that is hard to get otherwise. That said, every investment idea – in any asset class – has to stand on its merits, so I think it would be wrong to think of any aspect of the Future Fund's portfolio as an 'easy sell'.

How attractive to you is Australia's private equity market?  

Our return objective (CPI +4.5 percent per annum over the long term) is couched in terms of Australian inflation and we operate in Australian dollars so as a general point, Australian investments have some in-built advantage and we're overweight to Australian private equity in comparison to its weight globally.

We continue to see opportunities in this market, have good relationships with a number of Australian managers and look at opportunities to build on this, while acknowledging that we're a global investor and with a global opportunity set to consider.

Which other geographies around the world have attracted your attention?  

We look globally and clearly our current weighting is towards the US, other developed markets and increasingly emerging markets, particularly in Asia.

What is your attitude to first-time funds?  

We consider all opportunities where we can put capital to work at a meaningful scale, but naturally need to look particularly hard at opportunities where the general partner is new.

It's not necessarily a deal-breaker and we are attracted to the idea of getting access to a strategy that is new and where there is strong alignment to our interests.

How about direct investments?  

We invest through external investment managers, but co-investment is a significant part of our programme and one that has grown really materially over the last couple of years. While it is more demanding on our time, there are benefits in terms of increasing exposure to quality opportunities and reducing overall fee drag.

What are your key criteria in partner selection, and in turn, what makes Future Fund a good co-investment partner?  

As you would imagine we assess partners based on past performance, stability of the business, quality of people, clarity and consistency of process and the fees and terms on offer. We'll consider the opportunities for co-investment and how those opportunities are structured and made available to us. We'll also look at the extent to which partners can contribute insights and perspectives to our macroeconomic views and perspectives on investment opportunities across markets. In the end, what we are looking for are partners who are aligned to our interests and willing to genuinely partner with us.

Ultimately, what makes anyone a good co-investment partner is the ability to make quick decisions and act upon them. In addition, we recognise the importance of the general in this equation and have no desire to climb over the top of them.

Is private equity becoming more or less attractive relative to other private asset classes?  

In a search for alpha, private equity continues to be attractive to us, but what we are seeing is that there is increasing competition from other investors and the supply and demand impact is having a negative impact on returns. This is one reason why we are selective about the opportunities and why we look for highly disciplined managers who can offer co-investment opportunities.

What's next for the Australian private equity market?  

We have recently seen a resurgence in the venture capital market with a whole raft of new firms cropping up. I'd like to see a resurgence in the later stage growth and small buyout markets too, which have traditionally been the best hunting ground for private equity in this market. In terms of challenges, intergenerational transition of the general partners is looming large and is leading us to be cautious as it's something that the private equity industry generally does not do very well. 

Assets under management at 31 March 2016

Returns per annum since inception

Allocation to private equity at 31 March 2016

Rise in cash holdings due to the prospects of lower future returns