Aussie Revolt

Is the recent pull-back from private equity among some Australian LPs distinctively Down-Under or the beginnings of a troubling global trend?

If you look up “Australia” in a section of the London Telegraph website called “National Cultural Profiles,” you will find an amusing, if incredibly broad, guide to the Australian national character, alongside that of many other major countries.

“Australians,” the profile reads, “are totally cynical of people in power or with too much wealth, respecting the little person, ‘the battler,’ rather than the winner. If you keep this in mind and don’t oversell yourself or undersell your Australian hosts, success, friendship and good times will be yours down under.”

Without delving too deeply into the murky waters of national psychology, it could be that the perceived power-and-wealth indicators of private equity fees are partly to blame for causing a meaningful number of Down-Under institutional investors to step back from private equity.

At least, one hopes that private equity’s recent setbacks in Australia have more to do with the nuances of that market, and less to do with the beginnings of a global revolt against the asset class. Because if what ails private equity in Australia is due to the latter reason, private equity’s future is obviously in trouble.

The most high profile institutional step-back from private equity occurred recently at one of Australia’s largest state asset managers – the Victorian Funds Management Corporation. In  April, the $37 billion VFMC parted ways with Head of Private Markets David Brown and Portfolio Manager Andrew Strachan (Brown also oversaw infrastructure and real estate). In a Pensions & Investments article about the departures, the CEO of VFMC, Justin Arter, said two things that seemingly were at odds. He said that VFMC’s clients, which are public entities of Australia’s Victoria state, had expressed concern that private equity as an asset class was a poor fit for long-term liabilities of the investors. He said infrastructure – a highly developed asset class in Australia – was a better match. Then Arter added: “Our private equity investments have performed fantastically so clients are either at weight or overweight in that asset class.”

So the VFMC doesn’t want any more “fantastic” private equity?

Meanwhile, the CIO of another major Australian institution, the $27 billion UniSuper, recently told a local trade publication that he is “not really” impressed with private equity returns. John Pearce added: “There are better opportunities in property and infrastructure than private equity and that’s where we’ll take on our exposure to illiquid assets.”

The comments followed the February restructuring of UniSuper that saw two private-markets executives step down. A market source says that UniSuper sold a “substantial” portion of its private equity portfolio in the secondaries market in March and has recently turned down opportunities to re-up with even its best-performing private equity GPs.

The Australian private equity market is by far the most developed in the Asia-Pacific region and it remains a popular asset class among key Australian institutions, such as the country’s giant Future Fund. But the fees standard to private equity partnerships have long rubbed Australian investors the wrong way. This was partly due to the strong Australian stock market throughout most of the 2000s, during which investors would ask GPs, “Why should I pay you 2 and 20 when I can be in public equities for 50 basis points?”

But there are also perception issues at play, particularly perceptions among some pensioners and politicians that private equity is a high-fee asset class as well as a feckless swallower of corporate assets.

Now that the long-term outlook of equities is less rosy, fees have been targeted as destroyers of superannuation value. An Australian government report released last year called the Cooper Review recommended that retirement funds focus on reducing fee-burden as a way of boosting savings. A government minister in charge of superannuation funds said: “Every dollar we save in unnecessary fees and costs will help Australians’ retirement savings go further.”

Local GPs are fighting back with facts, figures and policy initiatives that they hope will portray the asset class in a better light. The Australian Private Equity & Venture Capital Association (AVCAL) has just released a Code of Private Equity Governance, designed to reassure the public and the corporate world that private equity is about improving operations, not plundering them.

Perhaps more importantly, AVCAL, led by CEO Katherine Woodthorpe, has teamed with Cambridge Associates on research that shows Australian private equity funds outperforming Australian public equities across one- , three- , and five-year horizons.

No one is arguing that private equity is a low-cost asset class, only that its performance over the long term justifies the higher fees. The local industry is making headway, but there is clearly much more work and education to be done. “Something that is unique to Australia is this issue on fees,” says Woodthorpe. “Some of the local GPs are concerned. But they are pragmatic. There is plenty of money out there in the world, but of course it’s easier to manage a relationship with a local LP.”

A concern on fees, mixed with an investor perception that infrastructure and real assets should take up most of an institution’s private-markets allocation, certainly need not remain confined to Australia. The country was an innovator of infrastructure as an asset class and it its success with toll roads and airports exceeds its success with private equity, its allocation mix may be mimicked by other institutions around the world, which will find GPs defending their fees even more frequently and in more places than they already do.