LP interview: New Zealand's ACC

Private equity isn’t particularly important to New Zealand’s state-run insurance underwriter Accident Compensation Corporation (ACC). However, the firm – regularly labeled the biggest fund manager in the country – has always been an indispensable player to the asset class locally. Indeed, large financial institutions are so thin on the ground in New Zealand that raising a sizeable fund without backing from either ACC or the national pension system has been traditionally considered nigh on impossible.

This dominance is eroding as the domestic economy becomes increasingly complex, but it is still a rule of thumb. Meanwhile, the steady growth of ACC as an investment business – now with NZ$47 billion ($30 billion) in assets under management – is leading to strategic diversifications, with more resources diverted from public to private markets. Additional pressure to build out the investment operations has come with snowballing insurance claim obligations – currently NZ$53 billion – in a low interest rate environment.

Martin Goldfinch, head of private markets at ACC, was the only professional working on alternatives until about five years ago; he now leads a team of seven. There are about 30 investment professionals overall. ACC skews strongly toward public markets, allocating about 70% of its portfolio to fixed income assets, with the remainder going to equities. Increased focus on private markets is helping expand the scope of this agenda, but to date, only about 4% of the NZ$47 billion pot is in alternatives.

“When we look at alternatives, in principle, we are as happy with zero exposure as a relatively heavy exposure because we don’t think in terms of being overweight or underweight,” Goldfinch says. “We have always believed if you carve up the pie arbitrarily, saying ‘you do this and you do that,’ then those allocations will be filled irrespective of whether it’s the best use of the capital at the time. Similarly, if you build large teams to execute against a particular strategy, human nature may deliver the same outcome.”

Building exposure

In dollar terms, ACC’s alternatives pool is currently split in roughly equal thirds between real estate, infrastructure, and private equity. Infrastructure and real estate investments are predominantly direct, with much of the key activity being in public-private partnerships around local transportation and prison projects.

The PE business is more variable, with about half the allocation going to fund positions and half going direct. Unlike real estate and infrastructure, much of this is directed offshore; last year the majority of fund commitments went to Australian GPs. Check sizes are small, usually topping out at around NZ$50 million for direct deals and even less for fund commitments.

“We like the return that PE funds can generate, but as much as anything, we do it as a route to market that allows us to go direct and get meaningful positions in investee companies through co-investment,” Goldfinch says. “In practice, that means measuring relationships in a total sense: what returns we get as an LP in the fund and what we get from the overall relationship, including co-investments. We style ourselves as partnership investors, and in terms of partners, PE funds are very well suited to that.”

Despite ACC’s strong preference for direct investing, as a government entity it is reluctant to take controlling positions, which would effectively render targeted assets as government entities as well, introducing a range of bureaucratic complications. Its largest single asset in the alternatives portfolio is a stake in Kiwibank, a financial services provider controlled by New Zealand Post. ACC took a 22% interest as part of a deal that valued the bank at NZ$247 million in 2017.

Buyout fund positions are seen as a way around the limitations on taking control stakes. Current relationships include the two leading local GPs, Direct Capital and Pencarrow Private Equity, both of which have raised their fifth funds with support from ACC. Co-investment alongside Pencarrow has seen ACC participate in two of New Zealand’s highest-profile exits in recent years: the sales of sports apparel retailer Icebreaker and beverage maker BrewGroup, formerly Bell Tea & Coffee, to US and European strategics, respectively. 

Wider scope

Considering ACC’s small team is inherently limited in its cross-border capacity, fund positions have proven helpful in geographic expansion. Australian exposures currently include Quadrant Private Equity’s fifth and sixth flagship funds and the second and third vehicles from distress and special situations specialist Allegro Funds. ACC, which has gone on to co-invest alongside Allegro, sees the GP as a particularly successful relationship and a standout example of why LPs should maintain a balance between direct deals and LP commitments. 

“A lot of LPs would argue specialist PE investing is a skillset that they can adequately do themselves so why bother with intermediated investing. It’s a debate with merit to both sides, but to me generally, PE funds give value because they are experts at what they do,” Goldfinch says. “With some exceptions, I don’t think LPs could or should do turnarounds, for example. That’s a whole different skillset and one that we don’t ever intend to do ourselves. That’s why I see a hybrid strategy, going direct and through funds, as much sounder.” 

Flexibility can also be seen in an appetite for secondaries, including participation in a portfolio restructuring by RMB Capital Partners, an investment manager for South Africa’s Rand Merchant Bank and one of the last captive private equity firms in Australia. The transaction, led by HarbourVest Partners in 2016, allowed RMB Capital – now known at Pemba Capital Partners – to set up a first fund with a corpus of A$650 million ($426 million).

“A secondary can be a good opportunity for us. It’s a good way to understand the nature of a manager with a commitment that is not as much of a marriage as an LP position,” Goldfinch says. “Secondaries also allow you to avoid the more difficult things around PE commitments, including j-curves. A structured secondary is even more interesting in terms of complexity, but also in possible return given its complexity.”

Another brush with specialization in a decidedly generalist private equity environment has come with a commitment to the debut fund from Australia’s Potentia Capital, which focuses on later-stage technology companies. ACC has already co-invested alongside the GP in Education Horizons, which claims to be the largest wholly Australian-owned K-12 school management, teaching and learning software provider.

Potentia reached a first close of A$180 million ($119 million) last year for its fund and claims to have about A$300 million worth of firepower overall, including co-investment capacity. The GP, founded by technology entrepreneur Tim Reed and former Francisco Partners investor Andrew Gray, has estimated that the Australian software market will be worth A$17.8 billion by 2021.

Lift off

ACC believes that a generalist approach remains appropriate for a market the size of Australasia but got comfortable with Potentia due to a genuine understanding of the GP’s thesis and a high degree of confidence in the quality of the individuals behind the strategy. The search for deeper connections of this kind has led to a reduction in the number of GP relationships in recent years from a peak of more than 10 to the current half dozen. Much of this has come down to a retreat from technology-focused VC.

“A critical part of strategy is to say what you do, but equally important is to say what you don’t do,” Goldfinch says. “Historically, we had a pretty rough experience in VC, so we chose explicitly to say we wouldn’t be there – but there are always exceptions. Over time, even some of the more doctrinaire views can change as the environment changes, as it may well be doing in the VC markets.”

The best and brightest of ACC’s VC exceptions is Rocket Lab, a New Zealand-founded and US-headquartered space tech start-up that has begun executing commercial payload rocket launches using 3D-printed equipment and what is considered the world’s first fully carbon composite orbital launch vehicle. ACC joined a $140 million Series E round for the company in 2018 alongside New Zealand venture investor K1W1, Australian sovereign wealth fund Future Fund, and a host of international VCs.

Rocket Lab, which has raised at least $215 million to date, is said to be worth more than $1 billion and a global frontrunner in commercial launch services, the space industry’s toughest segment to crack. ACC’s access to the company is perhaps the best example of how the firm is able to contrast its omnipresence in an intimate local market against the nimbleness that comes with a seemingly undersized bench.

“The wonderful thing about ACC is it’s a small team that can play the ball in front of them,” Goldfinch says. “We pop up all over the landscape because we don’t have a strict private markets program. We can fit many things into it and have a lot of coverage with a small number of people.”

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• Topics
• Australasia
• LPs
• Fundraising
• New Zealand
• Accident Compensation Corporation (ACC)