Australia: On the minds of top LPs

Steve Byrom, head of private equity, Future Fund
Jenny Newmarch, portfolio manager — growth assets, First State Super
Alex Wilmerding, principal, Asia investment team, Pantheon

What strategies can PE firms use to differentiate themselves?
Steve Byrom: “In addition to the origination model, the skill and resources they apply to their value creation models is what we look for as the key differentiator.”

Jenny Newmarch: “Given where we seem to be in the cycle, we like firms with some flexibility and experience investing across the capital structure, and between distressed and non-distressed opportunities. With capital locked up for relatively long periods, it is important to see a path towards deploying capital into attractive opportunities in all environments.”

Alex Wilmerding: “Local private equity firms can differentiate themselves by developing sourcing strategies and deep local networks which may contribute high quality, proprietary dealflow over multiple fund cycles. Generalist firms can differentiate themselves by developing domain knowledge and investment expertise in sectors demonstrating potential opportunity and by demonstrating a track record of investing successfully in these sectors through multiple cycles.”

How does Australian private equity fit in a global portfolio?
SB: “Because it’s our home market, there are some structural reasons why we would have a natural bias to invest in Australian private equity funds over global peers. We don’t have to manage the volatility in the currency. However, we still need to invest at the required scale and have conviction that the returns can be as good as the global peer set.”

JN: “We have quite a significant home market bias with 20 percent of our commitments in Australia across four relationships. Our ability to underwrite not only the domestic managers but the co-investments that flow from them can be superior and therefore we feel there is merit in having an overweight bias. The Australian mid-market also tends to be less competitive than the US or European equivalents.”

AW: “A global portfolio can benefit from exposure to investments in sectors which may offer particularly robust opportunities including education, tourism, health and agribusiness. Australian PE has a strong track record in sectors which have potential to benefit from macroeconomic factors unique to Australia, which is positioned near the growth economies in the Asian region.”

What’s your advice for first-time investors in Australia?
SB: “You need to be careful with the public market comparators as the index is dominated by miners, banks and a telco, none of which are really the target market for private equity in Australia.”

JN: “Don’t just look at the big names. When I speak to LPs from overseas they frequently seem only interested in the two or three better known and typically larger funds, with little appetite for unknown brands. The market here is also quite generalist, which can put off a lot of investors from overseas. However, the better teams have tended to have repeat success across the same two or three sectors.”

AW: “Spend time in the market speaking to GPs off-cycle when they are not fundraising, visit portfolio companies if you are invited to and observe managers through a fund cycle before making a commitment.”

Do you prefer global managers or local specialists? Why?
SB: “It depends where you are playing. Australia is a small to mid-sized enterprise market. That is where Australian private equity firms have made great returns historically. I don’t think accessing that end of the market through a global fund makes sense. At the large end of town, though, we see the global firms bringing enormous resources to a transaction and so I would tend to back global firms over local firms in that space. All else being equal.”

JN: “Our current portfolio is all accessed through local specialists. There are some fantastic global managers with strong operational teams. However, we find alignment of interest and deal sourcing is typically stronger with local teams. We also tend to prefer smaller funds which are generally limited to single-country funds.”

AW: “We generally prefer to access the market through local managers who tend to invest in the small to mid-market which can offer a deeper opportunity set, and more proprietary opportunities to firms which are well-networked and typically require cheque sizes that are likely to be smaller than funds operated by global managers.”

What are the most interesting trends in the Australian market?
SB: “Succession planning and management is a big issue in this market and because it’s generally not being done well, we are seeing a birth rate in new private equity and venture firms that this market hasn’t seen for a decade. This could be quite exciting.”

JN:“Emerging managers. After a long period of consolidation, there are several new firms cropping up which have been founded by highly experienced individuals, often filling spaces left by their prior funds either moving up or out of the market. I think the Australian landscape now is very interesting.”

AW: “These include international education, tourism, health and agribusiness. Australia has benefited from its proximity to student populations in growth markets looking to study abroad. Tourism tends to benefit from inbound travel from developed and growth markets, including markets like China which has a growing middle class keen to travel abroad. Healthcare typically benefits from an ageing population and a government framework of support for aged care. Australia’s proximity to Asia and its reputation as a source of safe, quality agriculture and food products supports a continued boost to the agribusiness sector.”

What has been your most successful investment in Australia?
SB: “Quadrant Fund 4 looks like it will be an absolute cracker, but I’m hoping the most successful ones will be the ones to come.”

JN: “First State Super’s programme is relatively new in Australia, so it is early days to call out the most successful. However, we have had some pleasing early gains in the turnaround and venture capital funds in our portfolio.”

AW: “Success can be measured at the deal and fund level. Investments in foodstuffs and consumables as well as healthcare have in some cases generated strong, outsized returns. Funds focused on the small to mid-market have in some cases generated returns which have well exceeded similarly sized funds in other global developed markets.”