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Shifting relationship with managers in private equity

Amanda White




Manager relationships are becoming even more important in private equity according to investors at Sunsuper, HESTA and New Zealand Super who spoke on a panel alongside Kohlberg Kravis Roberts & Co (KKR) at the Private Assets event.

Hishaam Mirza, who is a portfolio manager of international direct investment at New Zealand Super says the fund, which has no strategic asset allocation but rather invests on a completely opportunistic basis, focuses on manager relationships.

“We focus on our tier one group of managers who we want to leverage IP and get more from, we also have bigger ticket sizes with those managers.”

New Zealand Super collaborates with other general partners, for example through an innovation club to invest long-term patient capital, and another collaboration with the Wellcome Trust and TIAA-CREF. It also has a very close relationship with KKR.

In terms of negotiating with managers, he says the key is flexibility.

“Because we have a dynamic approach to investing, it’s important for us to be able to dial up and down. Also knowledge and IP sharing is important, so we do secondments, and get managers to come and visit us, and us them.”

Ali Satvat, a member at KKR, says the traditional model of private equity, which KKR helped build, is shifting and is moving towards working with clients.

“We look at what clients they are solving for and do we have something that can be helpful for them,” he said.

“When you have a differentiated relationship you have the ability to craft it however you want, so you can be very bespoke with governance, fees and time frames. We are getting better at this all the time. It all depends on what the limited partnership is solving for. That allows us to be very responsive, it’s a listening exercise.

“KKR is 40 years old, many of the partnerships are very in vogue, but we have been differentiated by always having a smaller number of concentrated relationships. The whole mantra of our founders, who are still very much involved, is around innovation and an outcome of that is how to partner better.”

Chair of the session Mark Lee, who is an investment manager at Sunsuper, said the issue of fees has meant the fund had moved towards more co-investment opportunities.

“We have a 6 per cent allocation to private equity. Initially we were very domestically focused, but that has shifted to offshore buyouts, which is now about two-thirds of our allocation. One of the trends we are definitely seeing is more meaningful relationships with GPs.”

Andrew Major, general manager of unlisted assets at the $34 billion HESTA, which has about 7 per cent in private equity and opportunistic growth, says the size of the commitments it is looking to make is increasing.

“Every new investment in private equity, infrastructure and property is between $75 to $100 million as a starting point. This makes manager selection far more important.”

“What would suit an investor depends on what you are trying to solve for. Private equity is structurally inefficient, from my view. You need a large number of manager relationships to get capital deployed; this has an effect on the fees you pay, and the scale and influence and active involvement you can have. When you look at those things and what we are looking to solve for, you are naturally looking to a more active approach,” he said.

“One way we are looking at dealing with that is being active with our international adviser. In Australia we are more active, and have mandates where we are the only investor and a bespoke fee structure.”

Major said in working with managers the terms depend on how much influence the fund wants over what goes into the mandate.

“It’s the balance between trusting the manager and what we want to put over the top of that. When it comes to fees, one reason to have a bespoke relationship is to move away from traditional fee models.”