LP interview: Australia’s QIC

Australia’s QIC was set up in 1991 to serve the long-term investment responsibilities of the Queensland government. By 2005, it had launched its private equity program with an immediate conviction that there should be no home bias. Four years later, the firm had laid roots in Europe. The US followed in 2011. This year, QIC’s first Asia office opened in Singapore.

Current plans include a modest expansion of the European GP roster, driven by perceptions of quality, opportunity in terms of competition, and specific client interest and mandates. QIC sees strong, risk-adjusted prospects in the region in areas such as software, digitally enabled businesses, healthcare, industrials, and parts of the consumer sector.

Last August, PenSam, one of Denmark’s largest pension funds, awarded QIC a DKK 2.2bn (USD 314m) mandate to make private equity investments in Europe over three years. This will include fund commitments and co-investments with a focus on lower-middle-market buyouts.

Stephen Whatmore, head of private equity at QIC, described the Europe buildout as underpinned by bottom-up, actionable factors rather than top-down macro elements. This conviction is further supported by a years-long build-up of credibility in the region.

“Private equity and venture capital is an invitation-only environment. You really want to be investing with the best in the market, and they will have a choice. Capital is a commodity, so we have to really think about how we position ourselves as a preferred party and a preferred relationship to our manager partners,” Whatmore said.

The hybrid

QIC has about AUD 103bn (USD 66bn) in assets under management across asset classes, with private equity accounting for about AUD 8.4bn. The bulk of the PE programme comes from Queensland government clients, including pensions, endowments, and insurance pools. About 45% comprises contributions from local private sector clients that take comfort in being aligned with the government.

Whatmore calls the firm an asset manager with a sovereign wealth fund profile and capabilities – a balance that is seen as supporting superior risk-adjusted returns. QIC’s performance since inception is said to be around 750 basis points above the MSCI Australia Index; its benchmark is to beat it by 300 basis points.

Over the long term, traction on this front has been associated with a lean toward direct investments – primarily in the form of co-investments – and a commitment to cultivating a concentrated GP portfolio. There are 22 professionals in the PE team, managing about 25 GP relationships. That could tick up to the low 30s with the Europe push, but likely no further.

There has been a gradual shift toward smaller funds in the buyout space. Several years ago, QIC tended to back funds raising in a range of USD 250m to USD 1bn. The target range is now closer to USD 150m to USD 500m, although there is still scope for larger funds where the opportunity is considered compelling.

The underlying companies in these funds typically have enterprise valuations of USD 100m to USD 750m, which QIC sees as a sweet spot in terms of thriving under private equity ownership. Edging toward the smaller end of the market has come with some commitments to first-time funds, although these are not led by first-time teams.

QIC has also been active in the theme of continuation vehicles, as seller and buyer. It has found that processes for determining fair value have improved with input from industry bodies such as the Institutional Limited Partners Association (ILPA).

The ratio of fund commitments versus co-investment is currently around 50-50, although the hope is to get to 60-40 in favour of co-investments. Being recognised as a preferred capital partner in terms of co-investment deal flow is now essentially a prerequisite for fund commitments.

“We have evolved very much to be an underwriter of opportunity. We will participate in syndications, but our preferred approach is to work alongside our private equity manager partners to underwrite deals and process them as they’re being addressed by the managers themselves,” Whatmore said.

“We see good alignment in that because we can provide supportive capital when they really need it. We can also eat the same cooking they’re eating in terms of getting insights into how they think about risk and return in different situations.”

The US represents about 50%-60% of this investment activity, while Europe accounts for 20%-25%, Australia-New Zealand gets about 10%, and emerging markets, especially China, represent the remainder. Recent direct investment activity in the region includes participation in a AUD 36m round for Australia’s Vald, a sports performance tracking technology company, alongside US-based Vistara Growth.

The directs strategy is most reflective of QIC’s goals as a sovereign wealth fund in a AUD 200m pool of capital earmarked for local technology companies, especially where they contribute to job creation. There have been at least three deals in this vein in 2023; the most recent, in July, saw QIC join a round of only AUD 3m for an advertising software company called Cartelux.

Modes of engagement

In addition to technology, core categories include healthcare and consumer staples. As tech-oriented company valuations have eroded in the recent term, the performance of more mature businesses in the buyout portfolio are said to have balanced the ship.

For example, North Australian Pastoral Company (NAPCo), a cattle range representing about 1% of the country’s landmass, experienced a significant valuation uplift in 2022-2023, driven by land appreciation and development work. QIC independently picked up a controlling stake in NAPCo for AUD 400m 2016. It was a milestone deal in terms of direct investment risk and rallying global support resources.

Still, co-investment with trusted GPs remains the preferred path for direct exposure to companies. Whatmore stresses that this is an effort to collaboratively bring value to the table in addition to improving returns and avoiding fees. However, it is not a strategy that will be pursued by compromising on manager quality or what constitutes an appropriate attractive fund outcome to get co-investment.

“We’ve seen some institutions buy into that equation, especially at the larger end of the market,” Whatmore said. “They have been able to generate large amounts of co-investment opportunity, but it carries a lot of risk. The quartile dispersion in private equity and venture capital is the largest of any asset class, so you have to be careful about stepping back from quality.”

QIC believes that getting access to quality is about a consistent and deliberate approach to engagement, often with a view to helping managers think through the institutionalisation of their footprint and framework. But this does not necessarily mean vetting periods are always extended.

“We process opportunities upfront and quickly. If it is a no, it’s a quick no. We’re not chewing up time and manhours with our partners on deals that ultimately we may not be interested in,” Whatmore said.

QIC’s key offering to potential fund manager partners is in support around environmental, social, and governance (ESG) protocols and best practices. Post-investment, the aim is to influence and promote the benefits of ESG integration through active participation in advisory committees, partnering with other LPs, and assessing and external fund managers. Having a global footprint plays into this skillset.

“We conduct an ESG assessment on every opportunity that we see at the fund level and co-investment level, and we conduct an annual ESG survey of our managers,” Whatmore said. “Pleasingly, we’ve seen the private equity partners in our portfolio are increasingly embracing that data convergence framework and feeding those metrics back to us through these surveys.”

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