Q&A: Future Fund's Raphael Arndt

Q: Future Fund places a lot of emphasis on technology exposure and capabilities. When did it become a priority? 

A: The importance of disruption as a trend across the whole economy, has increased over the last few years. That is a result of observing the world as well as the insights you get from having a pretty big VC program and exposure to some hedge fund managers that are using advanced computing techniques to help them position their portfolios. It was around the financial crisis that we began to question the traditional way of investing portfolios for long duration exposure to economic growth. Thinking about different ways to get an idiosyncratic exposure led us to venture capital. There was also the view that venture has traditionally done well after periods of recession. Over almost 10 years now, observing the companies we've been investing in and the trends that our fund managers are seeing in that space as well, has informed our thinking. You can take that and look at other asset classes. For example, we own businesses that have exposure to retail shopping centers. Everyone is aware that the way that retail occurs is changing because of the internet. Being able to see earlier how those effects might change the value of your assets or the approach a fund manager might take to that investment has been valuable to us.

Q: More recently there has been an increase in allocations to venture. How has this impacted your views? 

A: There is certainly more capital, and all things being equal, we would expect lower returns from that allocation compared to 10 years ago. Having said that, the drivers of good ideas – the use of mobile platforms, artificial intelligence and big data techniques that companies can increasingly use at very low cost, breakthroughs in biotechnology research, changing financial systems – are not going away. We are seeing as many, if not more, good ideas today as we were 10 years ago. There are parts of the ecosystem where we are more cautious, such as late-stage venture. While we do venture co-investment we have been careful to stay at the early stages of growth or we focus on unusual situations where we might already have exposure to the company so it's not a fully open funding round.

Q: How significant is that direct exposure?

A: We are not trying to build a direct team and compete against our fund managers. All those investments are alongside our managers. Sometimes the manager is an early-stage fund, so it can't follow on in later-stage rounds, but we can still rely on the manager for due diligence and offer insights into the company. I don't see the co-investment program as different to the manager selection part of the program, it's just a way to scale the capital and hopefully reduce the fees. Having said that, the program is now over $1 billion. We have made over 40 of those types of investments.

Q: Both Future Fund and GIC Private have described their approach to technology in terms of offense (investing in disruption), defense (exploring disruption in other sectors), and enterprise excellence (incorporating technology into its investment management). Do you expect other institutional investors to take a similar approach?

A: It comes down to whether you believe creative disruption will impact the investment management industry as much as any other industry. Our concern when we look at ourselves is that, like many single sponsor investment funds, we are not competing for capital and there is nothing in the market that keeps us efficient and cutting edge. In that environment, culturally it becomes quite hard to innovate. We see what is going on in the world and we need to apply it to ourselves if we want to stay relevant for our stakeholders. And more importantly, we think it can help us be better investors.

Q: How does the defensive technology strategy function? 

A: If someone in this organization has information about a business that is likely to be disrupted or an industry that could come under attack, we want to make sure it gets to people who might be invested in those areas. Our ESG [environment, social and governance] team is now also responsible for thinking about technological disruption and risk. Because of the way we have applied ESG to our investment program by integrating long-run sustainability risks into our modeling, it isn't really that different. The key is identifying the issues, understanding the issues, and then spreading the information across all our investors so they can take all those risks into account. We've already mapped our direct co-investment program into industries, themes and trends. If a new opportunity comes in, we have access to information about that industry, and we have a screening process internally so that any new ideas get reviewed by a variety of people across the organization. 

Q: Can you give an example of that?

A: There was one today. It's a company that sells insurance for automobiles and we wanted to know how the development of the autonomous vehicle impacts our view of that business. We have investments in companies that are developing autonomous vehicle operating systems, so we can develop a case on the earliest adoption and the latest adoption of the technology, and how it will vary by country and regulatory system. It will eventually reach a tipping point where that car insurance business changes. It all depends on what you pay for it, how you change that business on the way through, and how long you expect to own it. In this case, we are making sure the person responsible for the investment has got in touch with the right people and knows a bit more about those areas.

Q: Regarding enterprise excellence, how are your internal processes evolving?

A: The back office is changing pretty rapidly. We've always had a model where we outsourced the vast bulk of that activity to our custodian, so I'm not sure we have a back office in the traditional sense. We've got more of a middle office, and we are about two-thirds of the way through a major investment into our technology and data systems. This will involve an outsourced data-as-a-service arrangement with another organization. We want the two providers to pull together data points into an internal system and feed that information to our investors seamlessly, so they can access it in the office or on the road and use it to make decisions. For example, our property team would be able to look through our unlisted and listed property portfolios and understand the aggregated exposure to different sectors, different countries, and the underlying tenants in those businesses.

Q: What does this mean for your partner GPs and the ways in which they use data?

A: We have quite extensive arrangements with several of our macro hedge funds that enable us to glean their insights into what is going on in the world and how they are responding to it. We can aggregate those positions and feed them up to our investment making bodies, so the insights inform our own investment decision making. In private equity, a lot of GPs aren't open to this kind of arrangement, and that's okay, it's their business model. But the bar would be higher for us to invest in a fund that offered no value-add opportunity, just the investment returns. Over time, that style of investor will find it harder to justify the fees they charge. Due to the commoditization of data, the ability to invest in the listed markets with fractal lenses and build a particular style of exposure means some of the benefits you get from private equity have gone away. With the data techniques we now have, we can take that type of performance out of the return stream PE managers give us and assess whether they have skill in creating value in a more traditional sense. Those sorts of managers are still very valuable and we continue to invest in them, but over time I would expect more competition. Managers who are willing to work with us in a broader way are more useful to us.

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• Topics
• Australasia
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