AustralianSuper Eyes Private Equity and Credit

Andreea Papuc and Adam Haigh of Bloomberg report that Australia's biggest pension fund eyes private equity and credit amid low rates:

AustralianSuper, Australia's largest superannuation fund, is seeking private equity opportunities and looking to lift credit holdings as it sees limited returns from government bonds.

The fund is holding more cash than it would traditionally, Mark Delaney, the chief investment officer of Melbourne-based AustralianSuper, said Tuesday. It is underweight government bonds and maintained its long-term weightings in equities during the market turbulence amid the coronavirus pandemic, Mr. Delaney said.

"If we get a chance and the markets pull back substantially we'll look to deploy some of that cash, otherwise we'll look to start dribbling money into aspects like credit and hopefully really good unlisted opportunities," he said.

The superannuation fund that manages A$165 billion ($115 billion) of retirement savings for more than 2.1 million workers needed to move away from relying on fixed income to diversify given that rates are close to zero, Mr. Delaney said. It may boost foreign-currency holdings, employ synthetic strategies such as options and consider unlisted investments, he said.

Despite the dire economic data at the moment, Mr. Delaney said he was more confident about the economic outlook in 2021. There would be pressure on government bond yields to rise if a recovery took hold, he said.

"The underlying running yields are still very low now and the prospect of capital gains from here is quite limited unless there was a renewed, substantial economic downturn," he said.

AustralianSuper wants to ramp up private equity investments both in Australia and overseas, Mr. Delaney said. It's looking to do that through co-investments and co-sponsorships — where it gets in on a deal at the early stages — as well as taking underlying management exposure, he said.

"We've got an aspiration to grow our private equity exposure," he said. "We look to do that carefully as the market opportunities emerge and we can find good quality deals."
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Mr. Delaney sounds like a very smart man, ramping up private equity through co-investments and co-sponsorships.

In my last comment, I discussed CalPERS's $80 billion leverage plan which they will use to invest more in private equity and private debt.

AustralianSuper isn't leveraging up its portfolio but rather investing more in private equity and credit  and reducing its holdings of government bonds.

With rates at record low levels around the world, the rationale is definitely there to reduce weights in government bonds and increase equities, especially private equity.

The problem? Mr. Delaney hinted at it, if there is a renewed economic downturn say because of a second wave of coronavirus, then yields will stay low or go lower.

Right now, all global investors are asking the same question: who has it right, the bond market or the stock market?

But with the Fed juicing up stock markets by buying up corporate credit and hinting at implementing yield curve control, it's getting increasingly more difficult to read anything from financial markets.

Private equity firms are taking part in the mania, snatching up public tech companies:

Technology companies are spending less and less time on stock markets, as private equity firms, armed with a record amount of dry powder, move fast to take them private.

The median time from initial public offering to buyout since the financial crisis has narrowed to around six years, according to a new study by data provider PitchBook. At the smaller end - for deals worth $400m to $1.25bn - the time to buyout nearly halved from 12.2 years since 2015. Meanwhile, for companies worth between $1.25bn and $4bn, the median time to being taken private fell from 9.8 years to 6.4 years over the same period.

Turning their focus more towards growth, private equity firms have increasingly targeted fast-growing public tech companies in recent years.

"The revenue growth profile has risen for tech take-privates in recent years while operating margins have fallen," the authors of the report wrote. "This is likely a byproduct of PE firms opting to purchase more nascent and growth-oriented companies, focusing less on profit margins and debt capacity.”

Notable deals last year include the $3.8bn takeover of cybersecurity business Sophos by Thoma Bravo and the $5.4bn takeover of Tech Data by private equity firm Apollo.

The trend is set to continue, with PitchBook highlighting a number of potential buyout targets. These include security-focused companies such as SecureWorks and A10 Networks, education software providers like Rosetta Stone and K12, as well as stock photography company Shutterstock and crowd-sourced reviews website Yelp.

"We see security-related companies continuing to be a trendy target as tech-focused GPs roll up disparate offerings to try and create multifaceted offerings while riding the growth curve for the industry," the authors noted.

Why not? The mighty Nasdaq keeps forging ahead so these tech focused PE firms loaded with cash know they can buy these companies up and sell them down the road at higher multiples:

However, while tech sector is on fire, there's a different dynamic playing out with the hard hit cruise line sector where there is no light at the end of the tunnel:

Norwegian stock plunges after cruises put on hold through September https://t.co/YDuDCKGg5d

— MarketWatch (@MarketWatch) June 16, 2020

But I'm sure private equity will lend them a lot of money and make a killing off this and other hard hit sectors when their fortunes turn.

The dilemma for all pensions and large investors remains the same: Do they stick with government bonds where they know they won't make their requisite return or take on more illiquidity risk and ride out this storm, hoping they will be well compensated when economic activity picks up.

Remember, pensions aren't retail investors, they can patiently wait for a very long time for things to turn and their long investment horizon works in their favor.

AustralianSuper is doing exactly what it should be doing, the question is will it work over the next five years? They're confident it will but if the world gets embroiled in a prolonged deflationary cycle, then all bets are off and many pensions taking on illiquidity risk will pay a heavy price.

Below, AustralianSuper’s Chief Investment Officer, Mark Delaney, talks about the Fund’s response to COVID-19 over the past few months, and how the investment team are working to reduce the impact on members’ retirement savings (March 2020).