LP interview: QIC

The acquisition of a majority stake in cattle station operator North Australian Pastoral Company (NAP) earlier this year saw two threads of QIC's investment strategy intertwine.

First, the A$400 million ($295 million) deal represents a significant milestone for a group that is increasingly willing to lead domestic transactions of a certain nature - and NAP's expected return of 10-14% over a 10-15 year period makes it unsuited to the traditional PE model. Second, the transaction presented an opportunity for QIC to leverage its connections to foreign investors as a means of driving value-add. NAP's returns will in part come from supplying fresh beef to demand centers in Asia along supply chains that QIC plans to help build.

"Four or five of Australia's largest trading partners are in Asia, so there's often more we can bring to the table than just capital," says Marcus Simpson, global head of PE at QIC. "For example, it is estimated that 47% of global beef demand will come from Asia by 2024, and Australia is already the third-largest exporter of beef globally. It's a huge win-win where we have the supply and they have the demand. We're having a number of conversations with big food companies about how we can work together."

The GLPs

QIC, an investment manager owned by the Queensland government, had A$78.5 billion ($60.4 billion) in funds under management as of March and serves more than 90 clients, including governments, pension plans, sovereign wealth funds and insurance companies. The private equity portfolio was worth A$5.2 billion and co-investments - the first of which was made in 2007 - now account for about one third of the total.

In this respect, QIC counts itself as one of about 20 LPs globally with the remit, resources and will to take a proactive approach to co-investment by getting involved from an early stage and underwriting the deal alongside the GP rather than participating in downstream syndication. Josh Lerner, a professor at Harvard Business School, Bain & Company's Hugh MacArthur, and Simpson even coined a phrase for this phenomenon: the GLP or next-generation investor.

"We weren't really a GP or an LP, but kind of an in-between," Simpson says. "I think GPs have realized that actually there's a new set of investors they can collaborate with, and it leads to a much closer relationship with the LPs. A GP would want to use LPs to co-underwrite a deal if they trust that they will do what they say they're going to do. There may also be a bonus aspect in that, for example, you may have an Asian LP and the target company has operations or expansion capabilities in Asia."

NAP is evidence of QIC's ability to act independently on domestic deals, taking advantage of the fact that counterparties present opportunities and influenced by its real estate and infrastructure teams, which are experienced long-term direct investors. Offshore transactions, meanwhile, are structured as co-investments. The QIC private equity team - which currently numbers 14 - draws on its network of portfolio GPs and select other managers to source deals, often where assistance is required with an Australia angle.

"In one situation a US manager was buying a US business but they want to make a big add-on acquisition in Australia. We've known the manager for a long time - we helped them get their first institutional fund off the ground - and this is the fourth deal we've done with them," Simpson explains.
"They needed a partner for this deal, so we shared the equity 50-50 and when we were doing due diligence with the management team they mentioned there was an Australia-based company becoming more visible in their market and did we known about it. When the time is right we'll work with them on that."

Middle market focus

Most of the managers QIC backs globally tend to raise funds in the $250 million to $1 billion range. This preference for the smaller end of the market is underpinned by a desire to focus on company building rather than financial engineering. Over the last decade, there has also been a shift from generalist to specialist (in terms of strategy and theme as well as sector). For example, QIC declined to invest in an Asia-based middle-market GP until 2012-2013 when it was convinced that strategies were predicated on genuine differentiation as opposed to the pursuit of passive pre-IPO deals.

While first-time funds are considered, there is usually a relationship with one or more senior executives that stretches back several years - and with that, a comfort that they are a good fit for the strategy. In one instance, the founder of a GP previously served as CEO of a company backed by a well-known private equity firm, so he was a known quantity. The founder set up on his own, raised capital through his personal networks and deployed it, and then QIC came in as the anchor LP when he was ready to raise his first institutional fund.

As to whether QIC, as a GLP, may ultimately pose a competitive threat to GPs by pursuing more deals on a direct basis, Simpson says it is generally better to be a partner than a rival. Even in Australia, there is no desire to be one of two dozen buyers in an auction process, so the firm will only exert itself where its proposition is genuinely differentiated: for example, if there is a Queensland relevance or need for long-term capital.

"There was one growth transaction where the owners through to raise money from the private equity community but they were only offered capital for 3-5 years and they wanted seven years," Simpson recalls. "It was a local business so we said, ‘Yes, we'll give you seven years' capital.' We can step out of the box."

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• Topics
• Australasia
• LPs
• Fundraising
• Australia
• QIC
• Co-investment
• Direct investment