Australian LPs make for sophisticated co-investors - AVCJ Forum

"The level of sophistication in this market is at a higher level relative to what I see in the US public pension funds," Michael Arpey, managing director at The Carlyle Group, told the AVCJ Australia & New Zealand Forum in Sydney. "[The US funds] are trying to pursue the same strategy as sovereign wealth funds and they don't have the same history of doing this kind of thing."

In contrast, many Australian LPs already have direct investment experience in the infrastructure space, and Arpey noted that this makes them better prepared for co-investing in private equity deals.

This view was echoed by Thomas Frei, senior partner at Akina, a fund-of-funds provider that targets Europe's middle market. He observed that the superannuation funds he deals with have an appetite for co-investment and a willingness to put resources to work on transactions. "We get proper feedback - and quickly - from the Australian market," Frei said.

LPs tend to participate in co-investments in one of two ways: working alongside the GP as a co-underwriter on deals, or waiting for pieces of an agreed transaction to be syndicated out to other investors. James Carnegie, senior managing director at The Blackstone Group, said that relatively few LPs globally are able to perform the former role so most opt for the latter, more passive approach.

Syndication is less risky and not as resource-intensive, but onus still rests on the LP to pick the right deals. "We buy portfolios with elements of co-investment in them and it is very clear to us that there are people who think critically about co-investment, and others who just do everything, which is not a recipe for success," said Jon Freeman, a partner at Coller Capital.

Moreover, even participating on a syndicated basis can be demanding. An LP might be given no more than 10 days to make a decision, so the scope for due diligence is limited. As Carlyle's Arpey pointed out, unless LPs are familiar with the target sector, investment stage, geography and risks involved in a deal, they are likely to be at a disadvantage when making decisions.

The level of time needed to manage co-investors can also be draining for the GP. "Last year we completed a deal that had three large co-investors and you have to think about how you manage that efficiently," said Ben Gray, managing partner at TPG Capital. "You can lose a deal because you are not focused on what you should be focusing on."

The AVCJ Australia & New Zealand Forum is being held in Sydney on March 3-4. For more information, see www.avcjausnz.com.

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• Topics
• Australasia
• LPs
• Buyouts
• GPs
• Co-investment
• AVCJ Events
• Australia
• TPG Capital
• The Carlyle Group
• The Blackstone Group
• Coller Capital