Australia's IFM: The customized approach

An investment last year in Colette By Colette Hayman, a retailer of handbags and fashion accessories, embodies several of the characteristics IFM Investors would like to bring to Australian private equity. It is a growth equity deal rather than a buyout; it came out of a multi-year interaction with the CEO, convincing him that the firm was not like most domestic GPs; and it involved deploying a large amount of capital on behalf of a single superannuation fund client.

IFM first made contact with the CEO in 2015 but decided it was not a good time to invest. However, they stayed in touch, watched the business grow, and took part when a full sale process was launched two years’ later. The IFM pitch was not for a conventional buyout.

“We told him that we liked the growth story but if we were going to do this we would like to partner with him, we didn’t want to buy a controlling stake,” says Steven Lipchin, global head of private equity at IFM. “He had one or two binding offers to acquire the entire business but he decided to walk away from them and work with us. He felt that to maximize his outcome, going with IFM would be a better solution.”

Colette is one of 10 or so domestic deals closed by IFM’s private equity team under direct investment mandates from Australian superannuation funds. The team usually deploys A$50-150 million in equity per deal but can go up to A$300 million. The strategy is intended to enable large institutional investors to access the middle market in a way that minimizes cost and maximizes autonomy.

“They are servicing clients who are very fee conscious and there was a motivation to find something to justify staying in the game,” says one industry advisor. “Can you circumvent the razzamatazz of a traditional PE organization with a different approach? The jury is out on that.”

The LP perspective is somewhat different. One longstanding client of IFM across different asset classes notes that passive commitments to blind pool funds is not necessarily what large investors want from private equity and credits the IFM model with demonstrating there is another way.

Transition time

IFM is owned by 27 Australian superannuation fund shareholders and has A$101 billion under management across debt, listed equities, infrastructure, and private equity. With A$2 billion in assets, private equity is very much the poor relation, but it has undergone a relatively rapid evolution in recent years.

Between 1995 and 2013, IFM raised and deployed around A$3.5 billion across seven private equity fund-of-funds programs, four Australia-focused and three international. Co-investment was introduced during the last domestic program. By the time Lipchin joined in 2012 it was clear to IFM that the future of private equity was not fund-of-funds, and those programs are now well into wind-down mode, with A$1.4 billion in assets remaining.

“I was given the task of moving it to direct investment, almost a blank sheet of paper,” he recalls. “First of all, co-investment became more ambitious. We started deploying more capital and moving from a passive approach to investing alongside GPs and taking a more active role.”

This evolved over the course of two years into the current fully direct model, with at least one fund-of-funds mandate rolling over into the new strategy around 2012. Lipchin says IFM now has several mandates – he declines to specify how many – and it looks to complete one or two deals per client per year, typically in a minority capacity.

In developing a model with the superannuation clients that are also its shareholders, IFM identified several “pain points.” Notably, LPs were becoming so big that accessing the middle-market through third-party managers was problematic: they wanted to deploy A$50-300 million in individual investments but could get no more than A$100 million of exposure to a A$1 billion fund.

Other pain points included: dissatisfaction with the cost of participating in PE as an asset class; the lack of transparency offered by closed-end funds; and a discomfort at not being able to influence the exit timeline for these vehicles.

The single-client mandates that ended up being devised are managed much like a traditional closed-end fund, but come with a few differences. First, LPs have visibility – and some involvement – as to what they are investing in, with deals channeled to particular mandates based on a pre-agreed set of preferences. Second, liquidity features are built in so that LPs can move or potentially exit investments. And third, they are lower cost than the traditional 2% management fee and 20% carried interest.

“It’s not that our cost base as a manager is lower; the overall cost base is lower because our shareholders and clients are one,” says Lipchin. “We don’t have to service the shareholder layer in terms of returns, and that is the layer where cost typically creeps in under the traditional private equity model.” He adds that IFM’s investment professionals, of which there are currently 11, are compensated in line with what they would expect to receive at domestic PE firms.

Flexibility first

IFM sees flexibility as its primary selling point to potential portfolio companies. Unlike a traditional fund, there are no limitations on its check size or holding periods. The mandates are evergreen in nature, which means positions could be held for as long as the return profile continues to make sense or exited at short order and the capital recycled into other assets.

IFM will ultimately be judged on its results, specifically whether it can deliver on the pitch of lower costs than traditional middle-market managers but with equal performance. “Finding a special sweet spot where you achieve supernormal returns for modestly lower fees with by definition less demanding resources is a brave experiment,” a local PE manager observes. “It may work but markets are very competitive.”

At present, there is nothing else in the market that is readily comparable to the IFM model, although people are said to be working on products that address the value-cost equation. They could include managers operating deal-by-deal who bring opportunities to LPs on a one-off, low-fee basis. When asked whether there will be sustained competition in the space, responses from industry participants are shaped by their perception of super funds and fee sensitivity.

“We are sophisticated enough to be able to understand the trade-off between cost and quality,” says the longstanding IFM client, adding that he would like to see other innovative structures but the ease of the blind pool approach and the amount of demand for PE exposure globally mitigates against it. A fund-of-funds LP is more jaundiced in his view: “If IFM cannot say, ‘We aren’t the best but we are the cheapest,’ it’s not going to work.”

Meanwhile, the longer-term – and somewhat hypothetical – scenario under which superannuation funds hire in-house teams and make direct investments themselves does not worry Lipchin. “We are not afraid of sharing information with our clients and having them understand how we do things,” he says. “We believe we can be faster and more innovative than them. As long as we are doing our job well, our clients are not going to disintermediate us.”  

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Australasia
• Fundraising
• Buyouts
• GPs
• LPs
• Australia