QIC: Innovation is a big influence on returns

Asian consumption trends remain a key growth driver of QIC’s PE portfolio, says head of global private equity Marcus Simpson.

Queensland Investment Corporation, the investment arm of the state of Queensland, is upbeat on innovation and the Asian consumer story as it continues to ramp up investments riding on these trends.
Marcus Simpson, head of global private equity at QIC, says the fund is seeing a tremendous opportunity to grow the North Australian Pastoral Company (NAPCo), the cattle business it bought for a reported A$400 million ($300 million; €280 million) in May this year.

NAPCo, one of the oldest and largest cattle businesses in Australia, owns and operates close to six million hectares of cattle stations across Queensland and the Northern Territory. Under the deal, QIC intends to build the supply chain to Asia and grow the business significantly. It will also invest on a much longer timeframe, expecting to hold its 80 percent stake in NAPCo for 20 to 30 years. Central to its strategy is the rapidly growing and changing Asian market and its surging demand for safe and sustainable food and beverage products. Simpson adds QIC is working with Asian strategics who are helping to create demand-driven opportunities for the business.

According to ANZ’s Opportunity Asia Report, which polled over 1,000 Australian businesses, rising incomes and urbanisation are leading to changed consumption preferences and patterns in the region which favour Australian produce. The report also found that exporting was the most popular method for agri-businesses to expand into Asia, with 83 percent saying this was their market entry strategy.
Along with food production, Simpson says healthcare is an area QIC favours. “Healthcare has been a huge driver of returns for QIC … but we are careful on entry prices because these can be pretty high.
“We are less likely to do direct investments into biotech start-ups, but certainly healthcare services is an area we like. It’s also where Australia has a competitive advantage and we’ve got some great relationships with managers who help us access transactions around the world.”

About 30 percent of QIC’s global private equity portfolio is dedicated to venture or growth companies, an investment theme that has been in development since the programme’s inception in 2005.
Among companies in its venture capital fund portfolio are Chinese ride-hailing company Didi Chuxing, as well as its US rival Uber, Atlanta-based cloud advisory and technology services company Cloud Sherpas, and social networking giant Facebook.

In terms of strategy and geography, QIC holds a less than 5 percent exposure to Australia. North America receives the lion’s share at 60 percent, emerging markets 20 percent and Europe about 17 percent. A team of 13 private equity experts manage the global portfolio, which is valued at A$6 billion.

“We still find investments to make although investing is at a slower pace than a few years ago mainly because for bog standard deals, the pricing is just so high and competition is intense,” Simpson explains. “We have occasionally invested lower down the capital structure from traditional ordinary equity and found some attractive risk reward opportunities there.”
Along with the rest of the investor community, Simpson agrees that the world today is not an easy place to generate returns.

“We are all feeling the impact of a lower growth environment and I think the expectation for us is that private equity still needs to outperform public equities by 5 percent to 10 percent per annum,” he says. “We’ve seen some numbers that seem to indicate that the expectations for public equities over the next five years is about 6 percent and that means the private equity programme should deliver 11 percent, with a cash return at around zero.

“The deals that we look at sort of pencil in low 20s gross return so then we’re also trying through our investments in other things to convert as much as the gross to net returns.”
Simpson highlights that QIC has always been focused on the micro-cap space, growth and venture. “There’s certainly a lot of competition there. But we don’t necessarily see people driving down their return expectations to put more money out the door.”

The Queensland government’s A$76 billion investment manager said in its latest annual report that foundation clients have received a 17.5 percent per annum investment return (net on a hedged basis on all realised and unrealised investments) since inception to 31 March 2016. This is 7.9 percent above the public market equivalent. Moreover, its global private equity programme has created A$2.2 billion of net gains since inception in 2005, while direct investment returns have achieved 28 percent net per annum since inception in 2007.

Simpson says: “In terms of our approach we believe that innovation will still remain a big influence of returns going forward, and that the change in consumer will do the same. I think like everyone else we will need try to work through the impact of Trump getting elected. I think it does have an impact on Asia and you will find people slowing down their investment pace in Asia while they figure it out.”

Asked whether QIC is eyeing opportunities in the distressed debt space, Simpson says it is not going to swoop in just yet. “There is a lot of capital still on the side lines waiting for distressed opportunities but we haven’t really seen any cracks in the system. Our in-house economics team sees a steady 2 percent to 3 percent global growth for the next period. There’s no rush for us to do just that.”