Deep GP-LP relationships not defined by co-underwriting - AVCJ Forum

For many LPs in Australia, the past decade has been characterized by a movement closer to the ultimate assets, with relatively expensive fund-of-funds exposure giving way to direct investments in funds. Within the last five years, most groups have sought to become more active co-investors, though approaches are dictated by the scale of internal resources.

HESTA, a A$55 billion ($36 billion) superannuation fund primarily for healthcare sector employees, has sought to consolidate its GP relationships, with only about a dozen core managers accounting for the bulk of its A$3 billion in private equity net asset value. Will MacAulay, an investment manager responsible for private capital, describes the approach as thoughtful and flexible with a view to getting "the best-concentrated selection of the best ideas." They will co-invest, but not co-underwrite.

"That is beyond where we expect to go, at least in the medium term. We are not going full Canadian. We have a hybrid model of partnership," he told the AVCJ Australia & New Zealand Forum. "We are selecting GPs because we think we have found someone with a really differentiated view of the world, they know their market in a special way. That's what we are buying into. Co-investment allows us to fiddle around the edges, but we are led by the people in those firms."

This view was echoed by James Lilico a portfolio manager for private markets at Sunsuper, which has over A$75 billion in assets and a 6.5% allocation to private capital. It works with a core group of 20-30 GPs and has increased the focus on co-investment – partly to bring down overall fee exposure and partly to mitigate the j-curve effect. Sunsuper sources deals through the likes of HarbourVest Partners, StepStone Group and Neuberger Berman as well as from its portfolio GPs.

"We are not looking to re-underwrite deals. Why would you do that? It's what the GP is there for," said Lilico. "You have underwritten their team, strategy and process. You've got to test them – ask questions, understand the deal – but you can't say your whole investment thesis is wrong and then come up with a different one, that wouldn't make any sense."

NZ Super differs from its peers in the region, with NZ$6 billion ($3.8 billion) of its private market exposure through direct deals compared to only NZ$1 billion via GP relationships. However, the New Zealand-based sovereign wealth fund, which has NZ$47 billion in assets, abandoned its direct model last year. An international direct investment team was trying to source deals on a solo basis but being so far away from most of the target assets proved challenging. The team has since been redeployed.

"We would get the odd thing shown to us by a manager, but we always feared adverse selection if it was coming our way and we didn't have a relationship with the GP at the fund level. Why would they show it to us if they had already been around the tracks of their own LPs?" said Hamish Blackman, portfolio manager for external investments and partnerships at NZ Super. "You could say that after consolidation and the attempt at internalization, we are now back full circle and looking at our options in terms of new GP relationships and how we can do more of a co-investment model."

Knowledge-sharing is usually a key facet of these relationships. NZ Super prefers separately managed accounts (SMAs) and likes to include a provision requiring overseas managers to visit New Zealand at least once a year. The visitors don't necessarily have to be private equity dealmakers. There is also an interest in having senior research personnel address the entire NZ Super investment team on trends within certain sectors.

Communication and information are also priorities at HESTA. "We are looking for co-investment opportunities, information sharing more broadly, and thematic elements. The more we can bring those out in a systematic manner and apply them to other parts of the portfolio, the better. We are always trying to make connections across our portfolio," said MacAulay, adding that it might be as much about how HESTA can help a portfolio GP as the other way around.

In addition, closer relationships are expected to generate education opportunities, with members of an LP's investment team completing secondments with portfolio managers. They get no shortage of offers, so the challenge really becomes sifting through the different opportunities – from secondments to CEO briefings to research access – and deciding what would be most valuable.

"We've been offered secondments and we've had people from our investment teams across different asset classes take advantage of them. They are a nice thing to have, but can you take advantage of them? With smaller teams, can you take 1-2 weeks out to spend time with a manager? I think it's helpful for the junior team, less so for senior team members," said Lilico.

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• Topics
• Australasia
• LPs
• Fundraising
• Australia
• New Zealand
• New Zealand Superannuation Fund
• Sunsuper
• HESTA
• Co-investment
• Direct investment
• AVCJ Events