LP interview: New Zealand Superannuation Fund

When New Zealand Superannuation Fund (NZ Super) published it first performance and portfolio update back in 2006, domestic private equity investments represented just NZ$17 million - or 0.17% - of its NZ$10 billion of assets under management. The fund had yet to make any allocations to the asset class overseas.

Over the last six years, the situation has gradually changed. As of April this year, NZ Super - which was set up by the government in an effort to smooth the tax burden arising from costs of superannuation - had NZ$22.5 billion in assets. Nearly two thirds of this is in global and domestic equities, followed by 10% in fixed income. Private equity and other private markets receive 2% apiece.

However, the proportion of the fund which is allocated to private equity is not necessarily fixed as NZ Super operates under an opportunistic investment framework introduced in 2011.

"We no longer have a target allocation to private equity as an asset class; we think of private equity as a way to access underlying investment opportunities," explains Fiona Mackenzie, head of investments at NZ Super. "So it makes us a little different in that one year me might not be making any PE investments and another year we might make a lot."

At the core of NZ Super's strategy is a reference portfolio, a shadow portfolio that provides a benchmark appropriate to the fund's long-term aims and associated risk profile. It allows the fund to make investments outside its framework when markets diverge sharply from underlying fundamentals. The approach has gained wider appeal among sovereign funds looking to move away from a passive indexed portfolio to one that is actively managed and increasingly invested in private market assets.

The key benefit of the reference portfolio is that it guards against the volatility of capital markets. At present, the allocations in NZ Super's reference portfolio - which is classified more broadly that than the actual portfolio - are 70% global equities, 5% domestic equities, 5% global listed property and 20% fixed interest.

According to Mackenzie, of the fund's total commitments to unlisted mandates, the majority are domestic investments. This is mainly due to a large historical exposure to real estate assets in New Zealand. In terms of pure PE investment, however, only 25% is invested domestically while the remainder deployed overseas.

NZ Super's private equity program is now five years old, having made its earliest commitments to HarbourVest International Private Equity Partners V and the Adams Street Partnership Fund Program.

"Fund-of-funds were our first and second investments and then we took on an advisor relationship in 2009," says Mackenzie. "That is when started making investments into co-mingled funds and at that point we were looking to build of a diversified portfolio of private equity managers."

In the last few years, NZ Super has been involved in several deals of note at home. In March 2010 it joined Infratil in the $490 million joint acquisition of the downstream assets in New Zealand of Dutch petroleum giant Shell. It was responsible for one of the largest private equity investments of 2012, buying a 31.25% stake in New Zealand's Kaingaroa Forest from Harvard Management Company for $2 billion. Canada-based Public Sector Pension Investment Board also participated in the transaction.

Access Asia

However, emerging Asia is becoming an increasingly significant part of NZ Super's private equity exposure. It currently has three relationships in emerging Asia - one generalist fund and two real estate funds, covering China and India, respectively.

These include China Infrastructure Partners, a $426 million fund sponsored by BOC International and Temasek Holdings, and Red Fort India Real Estate Fund II, an India-focused property fund that reached a final close of $500 million in early 2012. NZ Super also invested in KKR's first Asian fund in 2007.

"We will increasingly use private equity managers where we don't have in house capabilities so I would expect more emphasis on managers for non-Australasian investment, but it depends on what opportunities come down our research pipeline," Mackenzie says.

NZ Super has also begun to dip its toes in co-investment deals. The fund has completed one transaction in the domestic market and operates a co-investment vehicle in China with two counterparts. However, capacity is limited by the small team size and its relative isolation in New Zealand.

"[The domestic deal] was a great experience for the team but it was only NZ$30 million in size so for the amount of work involved it probably wasn't of scale to be honest," Mackenzie says.

Instead, she sees the key development in the next few years as the amount the group is prepared to commit to individual managers. Historically, NZ Super's average check size has been NZ$25-30 million but in the future is will not deploy less than $100 million with a single manager.

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• Topics
• Australasia
• LPs
• New Zealand Superannuation Fund