Australian LPs still struggling with co-investment - AVCJ Forum

Michael Lukin, managing director and global head at Macquarie Investment Management Private Markets, told the AVCJ Australia & New Zealand Forum that much of the domestic institutional market is simply not structured in a way so they can manage assets in house.

“"It is an issue of compensation, remuneration and the ability to retain staff - they are market competitive,"” Lukin said. "“People are in-sourcing but no one is saying ‘How do we compensate and get alignment across our internal teams so that we get the same outcome as if we were outsourcing.’ It is about more than just saving five basis points in costs."”

While most LPs ask for co-investment rights in the limited partner agreement, or at least an informal agreement that they will have the opportunity to go direct, not all act on it. There is a wealth of anecdotal evidence of LPs being presented with opportunities that require a four-week turnaround and not being able to make a decision in time.

GPs with well established co-investment programs are generally aware of different LPs’ co-investment capabilities, industry participants say.

For example, Pacific Equity Partners is nearing a first close of around A$1 billion on a A$3.6 billion fund, comprising $2 billion in core equity and a A$1.6 billion discretionary co-investment pool. Sources told AVCJ that co-investment is unlikely to be available to more than 4-5 LPs with sufficient experience in this area.

Natalie Meyenn, head of private equity at MLC, added that an LP’s staffing requirements are ultimately dependent on its investment strategy: if the focus is primarily fund investing it can be done in house, and perhaps without any offices outside of Australia, but beyond this dedicated resources are a must.

“"If you are looking to be an active co-investor and secondary investor having local teams in local markets is incredibly important,"” she said.

One concern is that superannuation funds are retreating from private equity in favor of real estate and infrastructure because investments these asset classes are easier to manage in house. Even then, an in-house team can be a hindrance if it doesn’t deliver.

“"Once you build an internal team it is very difficult to stop investing in that area,”" said David Simons, director of private equity at Future Fund. "“If a GP underperforms we are not there in the next fundraise, but if you have built an internal team what are you going to do?”"

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