Years ago when I was an art dealer, my father Ray’s gallery was the venue for a raucous financial services Christmas bash held jointly by Shed Enterprises, a related party to the publisher of this newsletter and Principle Advisory Services. Famously uttered during the speeches by the then Principle principal, the inimitable Les Fallick, “if you’re not in private equity, you’re camping out”.
The collective groan/guffaw amongst those assembled was audible and the line has stuck with me. Roughly a decade later, it is remarkable to see how many people in the Australian investment landscape still have their tents pitched.
The Future Fund is definitely not roughing it. The Australian sovereign wealth fund’s most recent quarterly update reports a whopping 10.6 per cent of the fund’s $130 billion under management is accounted for by private equity alone, compared with its mere 6.5 per cent invested in Australian equities.
Members of our local industry funds have about half that sort of exposure; Cbus for instance has 5.9 per cent of its $35 billion in Australian and international private equity, however this is still considerably more exposure to the asset class than the vast majority of private investors and self-managed super funds.
Australian Tax Office SMSF asset allocations statistics released last year tell us that SMSFs are still heavily overweight Australian equities, alongside cash and investment property comprising the bulk of all allocations nationwide. Other alternatives, including private equity, barely register in Australian private portfolios.
Some investors are tempted by its relatively high returns but eschew private equity on a fees basis (like many institutions). Others shy away from the higher risk profile (whilst putting all of their eggs into the equities basket of a bank, a retailer, a telco and a miner).
Still others are precluded from joining the party because of a lack of opportunity. However, the vast majority of private investors seem to overlook it because they neither understand private equity, nor have financial advisors who are willing or able to divert from the approved product list.
For many investors, “private equity” is a bogey man phrase one reads about in the Australian Financial Review as having had something sinister to do with (insert whichever stock tanked for them that year). Over the weeks, this column is going to try and dispel a lot of that conjecture.
Conceptually, private equity is very simple. Firstly, it is an illiquid form of investment that often has a long term (usually 10 years). The proposition is that one invests capital with a mutual fund, which in turn purchases (usually controlling) equity stakes in privately held companies which are either perceived as undervalued or have potential for growth.
The portfolio of companies held by the fund within each vintage (the manager may have a number of funds with active investments operating at any period of time) is then guided by the manager whose team will often appoint and control board seats.
Thus, private equity businesses track (and drive) the progress and operations of their portfolio companies at a more intimate and proactive level than even the most assertive activist equities manager could ever hope. This is the key to value creation that drives the higher returns.
So if you are a private investor, hungry for returns, can stomach a bit of risk and are content with your capital locked up in an illiquid investment, what options are out there?
Well, as indicated above, there isn’t a veritable smorgasbord of vehicles on offer at the moment. The Swiss firm Partners Group has been one of the pioneers in the Australian retail space. Rated by Lonsec and found on a number of wraps and platforms, funds under management for their Australian Dollar Global Value Fund are currently sitting at just north of $430 million.
Mercer also offers a wrap product and there are a number of listed private equity options such as Blue Sky (whose ASX code is BAF). Other leading Australian firms with established and impressive institutional track records such as Stafford Capital Partners are also moving to become market players in the family office and high net worth space. Stafford’s fund of fund model offers exposure to Australia’s most successful, oversubscribed private equity funds such as Quadrant with a program that combines fund investment alongside co-investment opportunities.
Rooms at the inn might be sparse at the moment, and while hotel stock is growing, as private Australian investors, we’re still under the bivouac and it’s raining. Inside the one or two hotels in town, most of the super funds and asset consultants are huddled around the bar complaining about the prices of their rooms (a few groovy CIOs have opted for Airbnb), the Future Fund is happily ensconced in a suite upstairs next door to the family offices and a number of lucky SMSFs grabbed online reservations through the platforms.
Naturally, private equity owns the hotel chain. And the caravan park.
Evan Hughes is a private markets specialist at Shed Enterprises.