Q&A: HESTA's Andrew Major & QIC's Marcus Simpson

Q: How has your PE portfolio performed in terms of strategy and geography?

MAJOR: Our portfolio had a strong year in 2013, with positive valuation momentum and strong distribution flows. Over the longer term, performance of the portfolio is moving closer to the benchmark and is consistent with that of listed equity markets. All strategies in various geographies performed well and there were no real weak performers in the portfolio. Investment activity in Australia remains relatively slow, however exit activity picked up as the IPO window opened and remains open, which augurs well for further exit activity and distributions to investors in 2014.

SIMPSON: QIC's private equity was started in 2005 by a team with deep global experience and our investments have performed well to date. Direct investments, available at more attractive prices post-global financial crisis, have helped to boost returns, as have secondary fund purchases, venture and growth investments (mostly in the US), and emerging markets investments.

Q: How has your trustee board's attitude towards private equity evolved?

MAJOR: Our board retains a cautious outlook on private equity and has supported a change in investment strategy and, as a result, our ongoing investments in the sector.

SIMPSON: Sentiment towards the asset class has fluctuated over the last few years: some superannuation funds even closed their private equity programs. However, well-executed programs have performed well and demonstrated lower volatility relative to public markets, which have bounced around like kangaroos. We have noticed a gradual build-up of appetite for the asset class coupled with ongoing concern about perceived high fees with no guarantees of alpha. There are more implementation options available post-financial crisis, which goes some way towards meeting these concerns. Excellent implementation and the correct alignment of interests are keys to success.

Q: What are the implications of Australian LPs reducing commitments to domestic GPs in favour of global mangers and other asset classes?

MAJOR: We are not actively reducing commitments to local managers in favour of global managers, nor are we currently looking to reduce our allocation to private equity in favour of other asset classes. We continue to believe that suitable returns can be made in Australian private equity, although experience has shown that only the highest quality managers will be able to produce these returns. Our commitment size is increasing as our fund grows, giving us the ability to be more selective with our commitments and focus on a smaller number of high quality manager relationships.

SIMPSON: QIC Private Equity has from the outset sought the best global opportunities. Only 4% of the total portfolio is invested in Australia, in part because we believe that competition for deals had, until recently, been overheated. We expect our Australian exposure to increase as there has been some industry rationalisation, which has created a more attractive supply-demand situation. In fact, we are close to closing our second direct deal in Australia and are aiming to do more with a preference for agricultural services, mining services, and leisure - industries in which Australia has acknowledged competitive advantages. We are finding opportunities outside traditional buyout structures and pursuing arrangements that provide attractive capital for business owners.

Q: Are you seeing more co-investment opportunities? How do you manage internal resources to address these opportunities?

MAJOR: We see co-investments as an important part of a private equity investment strategy. We have executed a number of co-investments over recent years and will look to continue to make co-investments selectively going forward. We utilize the resources and expertise of our external advisors for sourcing, analysis and execution.

SIMPSON: The team has extensive direct investment experience and we've been co-investing since 2007 and have closed 16 co-investments to date. We have a defined strategy focused on specific sectors and types of transactions, driven by close partnership with a select group of top-tier managers. While many investors remain aspirational or are relatively new to co-investing, we're seasoned in this area have enjoyed good success so far.

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• Topics
• Australasia
• LPs
• Australia
• LPs
• QIC
• HESTA