Australian LPs consider diversified approaches to PE - AVCJ Forum

"Committing to a fund investment is one of the tools we have for private equity but it's a pretty inefficient tool from an LP perspective. You don't have control over capital, you can't play in and out of themes," Steve Byrom, head of private equity at Future Fund, told the AVCJ Australia & New Zealand Forum. "If I think India is going to be a big theme for the next five years I can put some capital there but that is about as narrow as you can be. We need to have other tools in the toolkit to scale into things."

Co-investment is the best known of these tools, although an LP's ability to participate varies. For the majority of institutional players, post-transaction syndication is the most common form of co-investment. Those with the mandate and resources - and Future Fund is one of them - seek to co-underwrite deals alongside GPs, while direct investment independent of a GP represents the extreme end of the scale.

In the case of numerous Australian LPs, direct exposure to private equity represents the continuation of an evolution seen elsewhere in their alternatives portfolios. The real estate and infrastructure programs at QIC, for example, are 100% direct and there is a high degree of operational involvement. The group, which is controlled by the Queensland government, co-invests outside of Australia alongside GPs and it has begun to go solo on certain, specifically long-duration, domestic deals.

Superannuation fund HESTA has yet to dispense with the services of GPs, but the development of its strategy is similar to QIC. "Our approach to infrastructure has evolved faster than private equity. We have fewer manager relationships and they are deeper," said Andrew Major, general manager for unlisted assets at HESTA.

One of the pressures facing HESTA and Future Fund, among others, is a rapidly expanding asset base. This means their minimum check size for individual fund commitments is increasing in size, making it harder to back smaller managers in Australia. Byrom noted that for certain domestic themes, Future Fund might build a franchise to address opportunities.

It is not the only LP open to using customized structures to achieve certain investment objectives. HESTA has been looking at fund-of-one structures - "We need to find innovative ways to continue supporting the domestic market," Major said - while the likes of Sunsuper and MLC are seeing more deal-by-deal and pledge fund-type entities.

For Sunsuper, customization is present at both ends of the spectrum. Michael Weaver, manager for private markets, explained that the group invests in distressed debt and other short-term funds to help manage out the lumpiness of PE returns, while at the same time it has backed a couple of managers with evergreen structures. Suzanne Tavill, managing director at StepStone, added: "By and large, some of the more innovative or differentiated structures have come out of the infrastructure space."

Diversion from the norm should become more commonplace if LPs are able to think innovatively, rather than only putting money with the top 10 managers in any particular year. "The mindset is what kinds of themes we want to expose our portfolio to?" Byrom said. "What do we want to play at and where do we want to play? Can we use private equity as well for these things? What do I need to put in place to supply these kinds of things? You start with a manager relationship and build from that."

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• Topics
• Australasia
• LPs
• Buyouts
• GPs
• Fundraising
• Australia
• Future Fund
• HESTA
• MLC Private Equity
• QIC
• Co-investment
• Direct investment