LP interview: AustralianSuper

AustralianSuper’s pursuit of Healthscope and Navitas – the former unsuccessful, the latter successful – in partnership with BGH Capital represent its most high-profile forays into domestic private equity co-investment. But a much smaller commitment made last November to automotive aftercare services provider AMA Group perhaps says more about the superannuation fund’s highly flexible, almost asset class agnostic, approach to deal-making.

Five months earlier, The Blackstone Group’s proposed A$508 million ($342 million) carve-out of AMA’s flagship panel repair business had fallen through because the Australian Tax Office turned down a request for demerger relief. The chairman and CEO both still wanted to take some money off the table and the company needed capital for expansion. AustralianSuper teamed up with Colinton Capital and Myer Family Investments to provide it, buying a 13.4% stake for A$68.6 million.

“We were going in with a listed company and prepared to be a long-term supporter of the management team. Colinton was there to be the operating partner,” says Shaun Manuell, a senior portfolio manager at AustralianSuper. “It is effectively a listed private equity deal, which speaks to the flexibility of our model. “We can look at anything and know we’ll have a home for it, if it’s a good deal.”

AustralianSuper is the country’s largest industry superannuation fund, covering one in 10 working Australians. It had A$142 billion in assets as of year-end 2018, 40% more than the second-ranked super fund. Private equity accounted for A$4.6 billion, or 3% of the overall portfolio. Under the balanced asset allocation model – used by two million of the super fund’s 2.2 million members – private equity receives a 4.6% share. This compares to 11.1% for infrastructure and 7.1% in direct property.

The super fund plans to increase its private equity allocation to 10% over the next few years, while there is a general push across all asset classes to bring more management in-house. Certainly, Manuell expects PE headcount to grow, but capturing the scope of AustralianSuper’s resources is not easy. Three people look specifically at GP relationships. When it makes a new fund commitment, any number of others could be involved from the 50-strong equities division.

“When someone comes in, we discuss who is most appropriate for it,” Manuell explains. “Some investors have issues with how they take you over the wall and deal with issues around confidential information. We approach Chinese walls slightly differently. If it’s a good idea, we take the whole fund over the wall. We want to write big checks and be a long-term investor. That optionality around trading – of being out of the market – isn’t worth as much to us as taking a long look at opportunities and being able to assess them properly.”

Agile approach

Investment coverage is broadly divided into mid-risk – focusing on infrastructure, property and credit – traditional fixed interest, and then equities, which serves as a catch-all for almost everything else. There is an emphasis on forming agile teams. When looking at a private equity opportunity, whether it is a fund or a co-investment, listed equity analysts and other experts are usually brought in to work alongside the dedicated private equity staff. These analysts offer sector knowledge, while gaining insights into how private equity works, which broadens their skillsets.

For fund investments, the AustralianSuper team also receives input from Hamilton Lane, the primary advisor for the international portion of its private equity portfolio. There are a small number of fund-of-fund relationships for domestic and international coverage – some run through IFM Investors, in which AustralianSuper is the largest shareholder – but these are being reduced in favor of dealing with managers directly.

The portfolio split is approximately 90% international and 10% Australia, with the former skewed towards North America. AustralianSuper is expanding its operation in London and will open an office in New York next year. From a PE perspective, the objective is to build deeper relationships with managers in those geographies and respond more quickly to opportunities as they emerge. “We don’t divide up the portfolio as mid-market versus large-cap,” Manuell adds. “We think about global diversification, but ultimately it’s about working with the best managers in the world.”

The super fund is highly focused in how it goes about this. There are currently eight international GP relationships – including TPG Capital, Leonard Green & Partners and New Mountain Capital – and fund commitments tend to be in the $300-400 million range. For co-investments, AustralianSuper looks to deploy $50-100 million per transaction. Most co-investments are made alongside portfolio GPs, although there is a willingness to work with non-incumbents.

“We have a gateway system for co-investment. Incumbent GPs go straight through and then there is a higher hurdle for non-incumbent GPs,” Manuell says. “For non-incumbents, doing a deal with us is a good in, because we get to have a look at them and see how they operate. If one GP is bringing us a lot of high-quality co-investments, why wouldn’t we invest in their funds?”

Venture capital does not feature in the international holdings, largely because getting access to top managers is difficult and check sizes are small even if access is granted. This approach is currently under review. In contrast, AustralianSuper has two VC relationships in its home market – healthcare-focused Brandon Capital and tech generalist AirTree Ventures – having joined the first wave of super funds to reengage with the asset class after the disappointments of a decade ago.

The home front

These commitments underline how the super fund is willing to take a flexible approach within Australia, where fiduciary responsibilities must be considered alongside those to the economy in general. Private equity exposure to the domestic market comes through global GPs that are active in Australia, a single pan-Asian manager, and three local players.

Asked whether AustralianSuper has ever been forced to sever ties with a domestic PE firm because its minimum check size is too larger for the fund, Manuell observes there is often room for compromise. “It would pose an interesting question if we ever said we were too big for the domestic economy. As it stands, we review everything,” he says. “The beauty of our internal platform is we could bring the check size down to $10 million in venture space or $50 million for traditional private equity and it may still make sense from a cost perspective.”

There is also an awareness of the sensitivities that arise when pursuing co-investments in Australia. Approximately 45 deals have been completed globally. The total stood at 40 when the super fund made its foray in the domestic market, joining a BGH-led consortium that bid for hospital operator Healthscope. Already a substantial shareholder in the company, AustralianSuper courted controversy by agreeing to vote in favor of BGH even in the event of a superior offer. This clause was removed when the super fund backed BGH’s bid for education services provider Navitas.

These are not seen as precedent-setting transactions that presage a wave of privatizations of companies in which AustralianSuper holds sizeable public market positions. With Healthscope, there were two key considerations: supporting co-investment partners and buying the asset as cheaply as possible; and, if that couldn’t be done, selling out at the highest possible price. Manuell stresses that deals are assessed on their own merits and much is up for negotiation.

“We look at bespoke opportunities and ask ourselves if they make sense,” he adds. “We’ve knocked back deals because the cost was too high and because we were in favor of current management and what they are doing. In those situations, we just don’t see how the GP will add value over and above the cost of taking the company private, paying those fees, and then relisting it again.”

Co-investment – especially co-underwriting, where the LP is involved in a transaction from the early stages – is essentially the private equity version of internalization. AustralianSuper’s total member assets rose 17% during the 2018 financial year, but investment costs grew just 2%, partly because more assets are managed in-house. While internal teams can handle fixed income and listed equities, the super fund still relies on external managers to make most of the decisions in asset classes like PE. Co-investment, on a no or low-fee basis, helps bring down the cost.

This is unlikely to change in the near term, given large-scale private equity deals are becoming more complex and top-performing GPs are increasingly those with strong operating platforms. “We want to be the financial partner of choice; we don’t want to be the operating partner. We want to be there, providing capital and having some governance and oversight, but that’s the distinction,” says Manuell. “Things may be different 15-20 years down the track, but for the foreseeable future, I think it’s a strong model for us, especially as we look to put more money offshore.”

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• Topics
• Australasia
• LPs
• Fundraising
• Australia
• AustralianSuper
• Co-investment