Australia’s pension giants prepare to storm private capital markets

Large-scale Australian pension funds that collectively control more than $2 trillion are expanding their in-house investment teams to join or even bypass private equity firms to place big bets on companies directly.

Australia pension industry There has been a period of consolidation in recent years, which has resulted in the emergence of several “super supers”. Now, they have the weight to copy the leading Canadian pension plans and go on an international shopping spree.

said Con Michalakis, chief investment officer at Statewide Super, an Australian pension plan that manages A$10.8 billion ($8.2 billion) in assets.

Large Australian pension funds have historically managed most of their mainstream equity and bond investment portfolios internally – mostly focused on local markets – while outsourcing their smaller allocations to more specialized areas such as private equity to large US and European players.

But in recent years, industry insiders say giants of the sector have begun to build their own equity teams, as they seek to cut costs to members. While maintaining the internal teams is expensive, it can be much cheaper than paying the fees charged by the big investment firms.

after series mergersThere are now 13 blue-chip funds with more than A$50 billion in assets under management, according to KPMG. These economies of scale make them more efficient in construction Internal investment teams.

“Some of these funds have grown to the size that you are now saying: Why would you give someone else money to invest on your behalf versus finding an in-house solution where you could invest that money yourself?” said Timo Schmid, partner at Boston Consulting Consulting Group.

Institutional investors around the world are exploring various ways to counter the bleakest expectations of future returns in stocks and fixed income – the backbone of nearly every major investment portfolio. Many have concluded that their best bet is to invest in “private assets” – investing in or lending to companies outside of the mainstream traded markets.

This led to a boom in private equity, venture capital and direct lending firms. Morgan Stanley estimates that private capital industry It has tripled in size over the past decade to $7.4 trillion, and is expected to balloon to $13 trillion by 2025. But with high fees on returns falling, some large institutional investors are beginning to invest in companies alongside private equity firms — or even Cut them down and invest directly.

The pioneers of this approach are Canadian retirement plans. Over the past decade, they’ve spent $180 billion acquiring companies, according to Dealogic, in deals ranging from Heathrow Airport To the Cirque du Soleil.

Column chart of the value of co-investments and direct investments by pension funds ($ billion) showing that Canada pension plans pioneered the trend of direct investment

The Australian pension industry managed A$3.1 trillion ($2.3 trillion) at the end of the first quarter, according to Australian Prudential Regulatory AuthorityInflows are set to grow even faster when the mandatory contribution rate for Australian employers rises from 9.5 per cent to 12 per cent by 2025.

Funds that have recently brought in private equity teams within the company include Aware Super – the A$135 billion super entity that was formed through the merger of First State Super and VicSuper in July 2020 and then through the acquisition of WA Super in December – and the Australian Super, the largest company in the country. The super fund has A$180 billion under his management.

Aware has partnered with private equity firm MIRA in a A$4.6 billion bid for Vocus, a Sydney-based telecoms group, while AusSuper has teamed up with Melbourne-based BGH Capital to bid for Virgin Australia.

Robert Credaro, head of growth assets at Aware Super, said its investment program will remain primarily built around a small number of close private equity relationships both in Australia and globally, but will continue to expand its direct investment capacity.

Bar chart of provisions as of the end of March 2021 (%) showing that

But analysts say there are limits to how much pension funds can go on their own. Even direct investments were often in partnership with the private equity firm that still handled most of the operational aspects, said Mark Wiseman, president of Alberta Investment Management.

“If it’s me [private equity investors] Steve Schwarzman or Henry Kravis, I’m not worried about these funds competing with me. “They are customers, not competitors,” he said. “Pension plans are good at allocating capital but not at operating the business.”

Martin Fahey, CEO of Australian Pension Fund Association“Pension funds are fully aware of the complementary role that the largest asset and interest managers play from partnering with pension fund peers in other jurisdictions when competing for quality rarefied investment opportunities,” he said.

However, in some stable and uncomplicated sectors – such as roads, airports, and property – pension plans are becoming increasingly comfortable when operating on their own. In terms of domestic deals, Michalakis said, the larger Australian funds are likely to start avoiding Wall Street entirely in the future.

“We’re seeing more co-investment now, and then we’ll see more complete laissez-faire going forward,” he said. “The Australian superstars will double in size over the next seven to 10 years, and they will have to become major players, both offshore and onshore.”

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