Australian supers drive secondaries

Not everyone in the private equity business has been disappointed by Australian superannuation funds' decision to reduce their allocations to the asset class this year. Managers of secondaries programs may have been far-sighted enough to realize that the supers would not only cut back on private equity allocations, but they would also seek to sell off their existing commitments. In doing so, this particular LP category has become an important seller base for both Asian and Western investors looking to buy up portfolios in recent months.

One of the drivers of the funds' mass move away from private equity is the Cooper Review introduced last year. Following the review, the Australian government established a default superannuation fund known as MySuper, which offers around 40% lower fees and leaves many existing supers struggling to keep up. The only option for most has been to reduce their allocation of fee-heavy asset classes such as private equity - but several, it appears, have gone one step further, and started to sell down their existing holdings as well.

"The Cooper Review has encouraged some investors to focus on marginal expense ratios (MERs) rather than ultimate returns which has certainly encouraged some of the supers to come to market and has driven dealflow for us," says Tim Flower, vice president for HarbourVest Partners Asia. "Going for the cheapest possible products to compete for people's contributions is going to make them followers rather than leaders in terms of how they can drive returns and take away their ability to outperform."

A second driving factor of deal flow is the increasing number of mergers amongst Australian supers over the past year. The spate began in November 2010 when First State Super merged with Health Super to form one of the Australia's top five supers by AUM. The union is apparently driven by the Cooper Review - put simply, the larger the fund, the easier it is to keep MER low.

"We've seen a lot of mergers of supers, which tends to refresh the way they look at asset allocation," says Flower. "You often get a change of personnel, and when the CIO changes within an organization, they frequently make changes and that can mean selling off assets."

Another reason for Australian disposals stems from the country's conformity with the more global trend for LPs to reduce their number of GP relationships in order to re-up with a more select number of managers. "Some have evolved their strategy through experience to more concentrated allocations, which may move them to sell down some interests," adds Alex Wilmerding, a principal with Pantheon Ventures.

Backdating vintages

On the buying front, much of the activity in Australia and elsewhere in Asia has come from relatively nascent LPs. Using the secondary market seems to have been a particularly good move for those programs trying to gain a degree of backwards vintage year diversification. "Private equity is about investing consistently through the cycles," says Flower of this trend. "So one of reasons secondaries are appealing to LPs who are new to the market is that they can back-fill their coverage and hopefully come in to those vintages at an attractive valuation."

Asian LPs who opened up shop six or seven years ago are also among those keen to take advantage of opportunities they missed the first time round. "Several years ago, many Asian institutions were just not at the stage where they were big enough and experienced enough to do private equity. It's an experience and comfort factor," continues Flower. Wilmerding, meanwhile, agrees that mature fund interests represent a proportion of present-day deal volume, but that while the turnover ratio declined globally between 2008 and 2009 and has only increased again in recent periods. .

Elusive talent

Top tier Asian GP talent, as in the primary market, continues to be highly sought after by both new and old LPs. According to Doug Coulter, head of LGT Capital Partners' Asian private equity arm, the "best in breed" fund managers, be they Chinese, Indian or Indonesian, are rarely seen trading on the secondary market. "The top-decile Asian managers are extremely hard to access, even on a primary basis," says Coulter. "What you'll often see trading hands are the second-tier names." He explains that on the scarce occasions that interests in top-tier GPs are up for grabs, they usually get snapped up by existing LPs and transactions are almost always done on the quiet.

So while the quality of interests traded might not always be of the top funds, signs of life are clearly beginning to emerge in the region's secondaries arena. Though the momentum from the Australian supers won't sustain the industry forever, as primary investment into the continent increases as forecasted over the coming years, the inevitable impact on secondaries is likely to be substantial. As Flower observes, "it's only really from the period 2004-2008 that you had significant capital being raised and invested, which is why Asia's secondary market is only just beginning. There's certainly going to be some attractive opportunities here in the near to medium-term future."

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• Topics
• Australasia
• Secondaries
• Australia
• Secondaries
• HarbourVest Partners
• LGT Capital Partners
• Doug Coulter