Private equity offers two bites of the cherry

Yasser El-Ansary

By

04/04/2018

OPINION | It is a well-established fact that long-term investing in private assets has been one of the major drivers of the Australian superannuation sector’s strong performance over the last 25 years.

But a trend that is less often acknowledged is that the value created by Australia’s private equity and venture capital sector often pays off twice for the country’s industry super funds.

Australia’s private equity and venture-capital industry is valued at about $30 billion. Roughly 25 per cent of that is sourced from local superannuation funds, mostly from the profit-to-member funds sector.

Long-term value

Putting capital into private equity and venture assets makes plenty of sense for long-term investors.

The consistent outperformance against other strategies is patently clear. There aren’t many investment strategies that can lay claim to consistently delivering after-fee returns to investors of 5 per cent or more above public market equivalents over the medium and longer term, even during periods of economic or capital market uncertainty.

Typically, private equity funds will have a three-to-five-year horizon on their investment into a specific business. When it comes time for a private equity investor to sell down their interest in one of their portfolio companies, there are three key pathways to exit: selling to a strategic trade buyer, selling to another private equity owner, or pursuing a sharemarket listing.

It’s the last of those three options that presents a unique opportunity for many super funds to realise the benefits of their private equity investment twice.

When the private equity backed business makes an initial public offering, it is not uncommon for some of
the same super funds that were investors in the private equity fund that helped to create an improved, more valuable and sustainable business to also become cornerstone institutional investors in the same newly listed business.

The data shows PE-backed businesses taken public are likely to continue to deliver sustainable increases in value over many years after the listing entity has sold down their interest in the business.

This is supported by the data analysed in the April 2017 Rothschild/AVCAL report examining weighted average returns for all initial public offerings since 2015 with an offer size of $100 million or more. This showed that the performance of private equity-sponsored businesses delivered a return in excess of 14 per cent. This compares favourably with a benchmark return of just over 5 per cent for the ASX Small Industrials Index for the same period.

Being able to participate twice in the ongoing value creation within private equity backed businesses is not something that can be planned for at the time institutional backers are making a decision to allocate capital. But it is a very fortunate outcome that can deliver for super funds, and the millions of hard-working Australians who are members of those funds.

Job creation

When you think about the macro context surrounding super funds investing in private equity, the picture becomes even more attractive.

Private equity funds invest billions of dollars every year into Australian businesses to help nurture and support their growth and expansion in domestic and offshore markets.

Recent analysis conducted by Deloitte Access Economics on behalf of the private equity industry in Australia confirmed that our industry contributed about $43 billion to the national economy in 2015-16, and through doing that, supported more than 327,000 full-time equivalent jobs across almost every industry sector of the market.

That represented roughly 11 per cent of all new jobs created across the economy. Given the competitiveness and productivity challenges confronting the nation over the years ahead, private equity investment should certainly be a feature of how we continue to modernise the economy and create jobs for the next generation of Australians.

Yasser El-Ansary is chief executive of the Association of Private Equity and Venture Capital (AVCAL).

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