June 4, 2014
Interviewed by: Ainslie Chandler
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Australia in Focus

Offshore LPs are increasingly engaging with Australia as they seek a stable, secure way to gain access to the Asia Pacific region, says MVision’s Nikki Brown.

Offshore LPs are increasingly engaging with Australia as they seek a stable, secure way to gain access to the Asia Pacific region, says MVision’s Nikki Brown.

Australia in Focus

With Nikki Brown of MVision

What presence does MVision have in Australia?

Nikki Brown, MVision:

MVision has been operating in this market since 2004. We worked with CHAMP and helped raise their second fund. We opened a formal office here at the beginning of 2013, staffed by me. I worked very closely with the team in Hong Kong but also across some borders—with the New York and London team. We try to act seamlessly.

The Australian market is very important to us, both in terms of GPs and in LPs. The pool of capital and superannuation is well acknowledged. We think it’s very important to be close to the people in the market so we can understand how they operate, but more importantly, the broader context they operate in.

Australian superannuation funds are increasingly looking offshore for investments. What is driving that?

Brown: It’s not necessarily diversification. In the early days of private equity, the locals were big supporters of the domestic GPs. That led to a bit of overexposure, where they made commitments to a large number of local players. It’s not unusual to see some superannuation funds with holdings in 10-15 or even more funds in the local market.

Now, we’re seeing more a rebalancing of that portfolio, taking into consideration the GDP of Australia versus the world. It’s a rebalancing as much as anything.

What do international GPs need to know about the Australian LPs?

Brown: The LPs here have actually been investing in private equity for quite some time. They’re fairly sophisticated in terms of what they’re looking for. The way private equity fits into the portfolios—there’s not one size that fits all, but in broad terms, they’re looking to private equity to outperform the rest of their portfolio.

It’s very important that a GP can demonstrate not only that they’re targeting returns in excess of the standard benchmarks—whether it be CPI or any private market equivalents—but they must be able to demonstrate that they can actually reach their net of fees.

A number of international GPs and LPs have started looking at the Australian market. What is the appeal?

Brown: Much has been made of the fact that Australia has proximity to China. It is an indirect beneficiary of the China growth story. We saw that play out clearly in the resource industry. As the economy matures and moves into different phases, the proximity to the much larger population markets of Asia is a very positive thing.

Also, the fact that Australia is actually an advanced private equity market in terms of its ability to take control of companies. Australia is actually one of the Asian markets that has a significant number of buyouts as compared to growth investments. That provides a degree of comfort to offshore investors, when they feel confident that the GP’s actually have full control over the company and are able to pull whatever levers are available.

How much activity do you expect to see in the Australian PE market this year?

Brown: We’re going to see a bit more momentum, definitely. The quality of deals coming to market is of a degree that makes it much more interesting to the private equity players, whether that’s because of the fundamentals of the markets they’re operating in or the quality of the management teams. Certainly, there will be an increase in the number of deals actually completed this year.

Do you expect to see an increase in fundraisings this year?

Brown: I think so. There seem to be more Australian GPs in the market now. Over the past couple of years, there has been a focus on driving value within the portfolio. With the recent IPOs, with the recent exits, we’re seeing GPs that are now more comfortable in the story they’re telling to offshore GPs.

We’re also seeing limited deal flow in other areas of Asia-Pacific. Markets like southeast Asia, which were very interesting in the past year or two, have now become a bit hot. We see very interesting markets like India, but still people are a bit hesitant. We see China as a market that continues to provide good opportunities, but still it’s from a growth perspective. In terms of developed Asia-Pacific economies, there seems to be a big gap and Australia is definitely of interest.

How has the political environment changed since last year’s Federal election and government change?

Brown: The political environment is always fairly stable. The rule of lore here is that it’s strong and people are well versed in it. People have a high degree of confidence in the infrastructure around investment.

Certainly, with some of the regulatory reforms in the past couple of years, that activity is now slowing a bit. Over the next few years, we’ll be seeing a period where those reforms are really battered down, certainly with regard to some of the MySuper and stronger super reforms. There was quite a bit of movement dating back three, four or five years. A lot of the superannuation funds have been spending time working out how they’re going to structure themselves in order to attract and maintain new members. Within that, private equity has been factored in and that has resulted in maybe a decrease in some of the super plans that were actually investing. But now, we’ve seen those that are committed to private equity formulating strong programs to invest for the future.

The government made some changes to Australian superannuation laws in recent years. How will they affect the PE market?

Brown: One key impact of MySuper was this drive for transparency and value for money. That led certain superannuations and trustees to focus on products that were actually low fees. The argument is there that private equity is a strategy. It’s not the lowest-fee asset class, but it could potentially deliver the highest returns. That has been a situation that many trustees have actually worked through.

Another thing about MySuper (and I think this dates back to previous years) is the portability and member choice. Members now can actually transfer their superannuation at will. We’re seeing the tail end of it now, but the focus for many funds on liquid strategies as opposed to private equity, which is a more illiquid structure, is largely being affected now.

One thing that does remain a bit uncertain is the impact of a stronger super on disclosure obligations. It’s yet to be finalized but it’s the obligation to report on portfolio holdings. Clearly, for an LP with a large number of private equity funds, this could lead to a very large number of underlying portfolio companies. There is a logistical impact there. That potentially could lead to a situation where funds in the U.S. or other difficult-to-access funds in Europe, for example, would question the ability of an Australian LP to be part of their investor roster simply because they’re not comfortable with that level of disclosure.

There are certain corporate sensitivities around releasing too much information. That is an issue we’ve yet to see play out fully. AVCAL is actually doing a lot of work with APRA and with ASIC to come to some resolution on this.  

Are GPs changing their models to try and retain investment from the Australian superannuation funds?

Brown: I think so. There definitely has been some movement in terms of management fees and underlying fee structure. With regard to portfolio monitoring fees, for example, we’re now seeing that it’s the norm for those fees to be offset 100% against management fee. That is a similar trend to worldwide.  

We’re also seeing in the Australian market a lot of real desire for co-investment and direct investment alongside GPs. There are a couple of major LPs here that are re-focusing their interest in fund; their interest in third-party GPs is more to ensure a steady flow of deals that they can participate in on a direct basis. They expect that that is done on a “no fee, no carry” basis, thereby blending the fees and diluting the fees downward. That definitely is a trend we’re seeing here.

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