The Australian visionary

Q: What are your thoughts on the current hot topic of superannuation funds and management fees?

A: The number one challenge [in the industry] that I hear from my colleagues on the private equity team is an almost lemming-like rush by the superannuation funds to a focus first and foremost on fee expenses before the GP itself. This is troubling because it's a greater pre-occupation here than it is in the rest of the world. That's not to say that [it's categorically] wrong, but it's a very Australian thing.

This is accentuated by the arrival of the MySuper default super scheme for Australians as a whole, and it's led to a short-term focus on fees rather than net returns. The only thing in the long term that makes any sense and is the basis for a sustainable outcome for the industry is net returns to investors. Funds could have a very high MER [management expense ration] and shoot the lights out in terms of net returns. Investors are risking missing out on that.

If this preoccupation with fees continues to dominate thinking, that will not be ultimate in the best interest of their investors - the superannuates - that [supers] should be looking after. I think it will be a tough sector for a while, but I think the pendulum will swing and it will come back to normal again.

Q: Moving away from the fees issue, what should investors be looking at in your opinion?

A: I'd like to think it's traditional benchmarks [which are important]: track record, consistency of the GP team, how they're looking ahead; cash to cash returns for investors... that should be the powerful set of factors that drive investments within the Australian market.

Of course post-GFC, nervousness and aversion among trustees that have made our fundraising slower than it might have been and will make other funds' experience slower I suspect.

Q: Are there tangible post-GFC issues which may affect the market and GPs operating here?

A: A number GPs who paid too much and took on too much leverage about three to four years ago will see these mistakes come to roost poorly in 2011-2012 in terms of pressure on portfolio company balance sheets. I think there will be a distraction for many in terms of working out those problems, rather than being able to put their attention to new, better priced deals. That will work through and will vary from one GP to the next.

Q: What are the relative strengths of the Australian market in the context of new deals?

A: It's clear there is increased excitement over developing world economies like India and China, where [LPs are allocating] more capital than developed world economies. But what's going for Australia is that we are open for business. We are going on 20 years of straight GDP growth, and we have a huge infrastructure and mineral resources boom underway - which will by our estimates continue for another decade or more. And that's a great engine; it's not the only engine for change, but it's a sustainable one. I think most investors see that Australia must be in their portfolio, and we as GPs operate in that climate. We can hitch some of our wagons to that circle of growth.

Q: The VC in Australia is not as well known as the private equity industry, however you've been active in that space for a while. Can you talk about where venture is now and where the opportunities lie?

A: I've been investing in venture since the ‘70s, and to some extent the future of venture has always preceded itself. The country needs it; we have a history and a culture of innovation; we have more than our share of Nobel laureates; we have inquisitive people and early adoption of electronics. On the other hand, we have a small market economy and we haven't been great at commercializing some of the discoveries. That continues to play out here.

Compared to 10 years ago, when I look at biotech, there are so many more Phase I, Phase II and Phase III trials in place that I just believe that the future for biotech and the prospects for some blockbusters is really close. I'm expecting - I just hope people hold their faith.

In other parts of the economies, venture must include the renewables sector. Carbon tax which has been promised will come. That will price new energies back into the marketplace. There ought to be better opportunities than ever.

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• Topics
• Australasia
• Buyout
• CHAMP Private Equity
• William D. Ferris