LP interview: Roc Partners

When Sydney-based Roc Partners separated from Macquarie Group in 2014, it had 18 employees and support offices in Tokyo and Hong Kong – all fundamentally in service of a traditional fund-of-funds for Australian LPs. Since then, Chinese investors have begun to play a larger role in the business, the Tokyo office was relocated to Shanghai, and the team has expanded to about 40, of whom 15 speak Mandarin. 

“Being able to engage with founders and GPs in their native language in a market like China is a real competitive advantage when you’re doing due diligence,” says Michael Lukin, a managing partner at Roc. “Understanding the local culture and local nuances helps you position yourself as a better partner to GPs in a market. I think that’s really important.”

Most essentially, the China pivot balances a low-risk, low-growth strategy in Australia with a market undergoing rapid and significant structural changes in the way people spend money and do business. But it also represents growing appetite for higher risk start-up investment in an otherwise middle market-dominated thesis.

“We’re very focused on China venture as an opportunity for our clients to get exposure to the next wave of technological development.” Lukin adds. “We’re seeing a real shift from the imitation of Western technology 10 years ago, replicating things like Amazon and Facebook, to an environment where China is now at the forefront, in some cases in front of the Western world in terms of technology.”

SMA-centric

Simultaneously offsetting and accommodating the conservative leanings of Australian pension funds – which still make up the bulk of the firm’s underlying investors – is core to the Roc approach. This has underpinned a strong focus on separately managed accounts (SMAs) for clients sensitive to management fees.

Roc works with each institutional investor for up to six months to tailor fund-of-one products that are typically heavily geared toward co-investment and direct secondaries. In aggregate, direct investments have represented about 50% of the firm’s activity for the past 10 years, versus 50% in fund-level commitments. 

Diversification efforts under this theme have included a social impact program, which saw Roc team up with the New South Wales government and First State Super in 2017 to launch the A$150 million ($97 million) Go NSW Equity Fund for regional small to medium-sized enterprises (SME). A similar concept is under consideration for other states.

Meanwhile, Roc has raised two funds under the Australian government’s Significant Investor Visa (SIV) scheme, which allows foreign high net worth individuals to advance residency applications by backing local PE funds. While most SIV funds concentrate on VC, Roc uses the scheme to pursue SME buyout and growth co-investments sourced through its GP relationships.

The latest move in this vein has been the development of a food and agriculture strategy aimed at filing unmet local demand and leveraging a range of trends around food security and changing diets across Asia. A Melbourne office is set to open later this year, in part to access operators in the agrarian south. Key investments include Stone Axe Pastoral, a beef supplier that claims one of the largest wagyu gene pools outside Japan.

Assets under management total about A$7 billion, of which A$6 billion is in private equity and A$1 billion is in various real assets, including some allocations to the agriculture agenda. Around 90% of total capital has been deployed in Asia Pacific, with China and Australia the largest targets. Southeast Asia and India are part of the mix, and there are long-term plans include a potential expansion office in Singapore. 

Addressing Asia

Roc has raised four comingled fund-of-funds with this strategy, the latest of which hit a third close of $120 million this month, surpassing a $100 million target. A hard cap has been set at $150 million – Fund III raised $130 million in 2018 – and a final close is expected in June. GP selection will prioritize the ability to generate consistent returns across cycles through strong operationally capabilities.

“We’re looking for managers where everything they do is about how they create value and create a better business on the way through,” Lukin says. “Even if you’re buying high and selling low, if you still create a business that’s a better business, you’ve still got a chance of making money on the deal because you’re creating a better business and more sustainable earnings through operational improvement.”

Roc currently has about 20 GP relationships, including a position in the sixth buyout fund of Australia’s Quadrant Private Equity. Fund commitments in previous years have supported global names the likes of The Blackstone Group, Riverside Partners, and The Carlyle Group, as well as regional actors Allegro Funds, CHAMP Ventures, and New Zealand’s Maui Capital. 

In recent weeks, COVID-19 has complicated fund assessment by placing an increased burden on understanding how various sectors will be impacted across different geographies. “There will need to be a little bit more discerning between industries in terms of recovery phases,” says Lukin. “The insight we get from our GPs around that will be important to our conviction around those managers and their ability to success in a post-COVID environment.”

One of Roc’s key macro observations during the outbreak has been that the border closures and finger pointing are essentially an extension of the geopolitical tension that came to a boil in prior months with the US-China trade war. This is expected to result in a large amount of capital being repatriated from East to West, which will in turn create Asian secondary openings. 

More virus-related opportunity has been identified in the idea that viable businesses attempting to come out of operational hibernation at a time of investor hesitancy may require bridge-style funding to re-launch. Roc is currently exploring a private debt business to fill the expected gap and hoping to go to market with a product as demand emerges. 

“Even though banks, landlords, and suppliers have all been accommodating in the short term, there is a question of how does this look long term,” Lukin says. “If we have a slower recovery than anticipated, we think that means a lot of this accumulated liability will come home to roost probably later in the year or in the first quarter next year.”

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• Topics
• Australasia
• LPs
• Fund-of-funds
• Australia
• ROC Partners
• Separate accounts