Industry Q&A: Matthew Arkinstall, Greenpark Capital

Matthew Arkinstall, Investment Director at leading secondaries specialist Greenpark Capital, gives his view of the current investment environment in Australia.

Q: What is your view of the current Australian market?

A: Still impacted, but in a better situation than markets in Europe and the US. What’s driving that is that the Australian banks are in a slightly better position. They were better going into the crisis, and are better coming out of it. The Australian economy has been relatively more buoyant: they only had one quarter of negative growth, so technically Australia didn’t even enter a recession.

Comparatively, Australia is in a better place, although obviously it’s a much slower place than it was about two or three years ago. The Australian economy also offers some interesting prospects, the most attractive being many industries dominated by stable duopolies, and a growth linkage to Asia in an environment with a mature legal and governance framework.

Q: What do you see as the position of the private equity funds themselves and where they’re sitting in the market?

A: I’m aware of some [Funds] that have taken significant hits on particular assets, but by and large they’re in a slightly better place than their international counterparts. We’ve got a few Australian assets, some of them performing well, some less well. What we’re seeing in our portfolio is reflective of what’s happening in the industry as a whole.

Again, the story of Australia, including portfolios, is yes, there has been an impact, but on a comparative basis, nowhere as severe as it’s been internationally. And the resurgence in the markets is probably going some way towards increasing values and repairing the apparent damage.

GP standards are by and large very high.  As an Australian private equity veteran I saw the industry mature from cottage industry in the early 1990s to an environment where the GPs meet the best standards found in the world.

Q: Does that mean that Australian LPs in particular are showing fairly resilient appetites or are they also retrenching?

A: There was a big pullback in Australia about 18 months ago, and it had a couple of sources. The first issue was the decline in public markets – the so-called denominator effect. People who were sitting at their allocation all of a sudden were overallocated in private equity, because the value of all of the rest of their portfolio had gone down substantially.

The Australian market had two other things that happened to LPs that didn’t happen quite as strongly in other markets, but were particularly keenly felt in Australia. The first was that the Aussie dollar plummeted in value as investors sought safe currencies around the rest of the world. Because most of the Australian private equity investors had international private equity exposures, and international commitments that were undrawn, all of a sudden the value of those undrawn commitments in Aussie dollars went through the roof.

The third effect was that in Australia, individual superannuation fund members can switch at a moment’s notice between different types of portfolio: high-risk portfolios with lots of public and private equity, all the way down to capital-stable portfolios with bonds and cash investments. A lot of Australian investors switched out of the portfolios that had a lot of public and private equity in them, and into the portfolios that had a lot of cash and bonds. That left those portfolios that had a lot of private equity highly overexposed.

You had three things going on: the usual denominator effect, a currency effect, and a switching effect. That meant that Australian investors were actually well overexposed to private equity about 18 months ago. Against that, you’ve got the fact that most of the Australian investors, the LPs there, are very cash-flow positive, because of the mandated legally enforced requirement to put 9% of payroll into the pension fund system in Australia. That pretty much guarantees that the Australian superannuation industry is growing and will keep growing for quite some time.