Study of Australian Superannuation Fund attitudes to Private Equity investing

Transcription

1 Study of Australian Superannuation Fund attitudes to Private Equity investing Australian study 2005

2 FOREWORD In Australia, superannuation funds are a major source of capital for the development of the economy with assets of around AUD700 billion and growing rapidly. Whilst almost all superannuation funds invest in listed equities either directly or through mandates with investment managers, the exposure to private, or unlisted equity is not universal, and restricted in most instances to the major superannuation funds; even then the exposure is small. This lack of exposure by most superannuation funds raises several issues: Why the exposure is low and what have been the major reasons for this? The opportunity cost for fund members lost by excluding private equity as an asset? This study is aimed at eliciting some of the reasons for the current situation, through establishing what are the attitudes of superannuation funds to private equity investments. By their nature, surveys sometimes show up not only the views of interviewees, but also that the survey questions may have not been appropriate, and thus further analysis is necessary. This survey is then one in an on-going series of studies, which Adveq is sponsoring with a view to improving the level of information regarding the attitudes of institutional investors to private equity investing around the world. Adveq has already engaged in similar studies in Germany and Switzerland, together with renowned partners such as the University of St Gallen and the University of Applied Science in Wiesbaden, and is planning further studies in other regions over the next 18 months. I wish to acknowledge the support of Adveq and Shed Enterprises (Adveq s representative in Australia) to undertake this survey John R Evans Associate Professor School of Banking & Finance; Actuarial Studies Unit Faculty of Commerce and Economics The University New South Wales April 2005 Australian study

3 TABLE OF CONTENTS FOREWORD 1 1. EXECUTIVE SUMMARY 3 2. STUDIED SAMPLE 4 3. THE RESULTS Current allocation to private equity Future allocation to private equity Other considerations when investing in private equity 9 4. SECONDARY FINDINGS The investment decision Key criteria for private equity investment Barriers to investing in private equity 14 Australian study

4 1. EXECUTIVE SUMMARY Allocation to private equity 75% of the respondents of the survey are currently investing in private equity. 26% of respondents have an allocation of more than 5% of total assets under management to private equity. The allocation to private equity is expected to stay fairly stable at around 4.0% to 4.5% over the next 2-5 years in Australia. Australia is and will remain the major focus for private equity investments. It is expected the current allocation to Australian investments will decline to be replaced with an increase in investments in Asia, Europe, and other regions. Future allocation to fund of funds and single pooled funds is not expected to change but direct investments are expected to decline significantly. Private equity investment objectives The most important objective of private equity investment is the ability to add value relative to benchmarks (usually listed equity indices), followed in importance by risk management objectives. The institutions surveyed expect an average absolute return of 16.5% and an outperformance over listed equity of 4.5% p.a. Investment selection criteria The study indicates that issues relating to the technical skills of the manager are the most important criteria in selection either a single purpose pooled fund or a fund of funds. Australian study

5 2. STUDIED SAMPLE The findings of this survey are based on a survey of Australian superannuation funds conducted during January 2005 with 40 respondents. The total funds under management of the respondents were in excess of AUD 120 billion, with an average of AUD 3 billion, against the industry average based on APRA data at September 2004 of around AUD 2 million. The sample we have used for analysis is therefore heavily biased to the very large superannuation funds. The funds under management of the respondents were distributed as follows: Figure 1: Breakdown of the funds under management AUD 10bn-AUD 30bn 2 AUD 3bn-AUD 10bn 12 AUD 1bn-AUD 3bn 10 AUD 500m-AUD 1bn 6 AUD 200m-AUD 500m 4 <AUD 200m Australian study

6 3. THE RESULTS 3.1. Current allocation to private equity Overall By total allocation 75% of the respondents of the survey are currently investing in private equity. Figure 2: Current allocation to private equity No 25% Yes 75% By assets under management Of those that already invest in private equity, 26% currently allocate over 5% of total assets under management to the asset class. The average allocation of respondents was 4.5%. The average current allocation achieved was 2.6% and almost all respondents indicated they had not achieved their targeted allocation. Figure 3: Current allocation to private equity by percent of total assets under management over 5.0% 26% up to 5.0% 45% up to 2.0% 13% up to 1.0% 10% up to 0.5% 6% 0% 10% 20% 30% 40% 50% Australian study

7 By type of investment Fund of Funds investment is the most popular type of private equity investment accounting for 48% of current private equity allocations. Direct investment are currently the least favoured route to private equity investing, accounting for only 20% of current allocation to the asset class. Figure 4: Current private equity allocation by type of investment Direct 20% Single pool 32% Fund of funds 48% By region of investment Australia is the most important region for private equity investments of Australian superannuation funds, accounting for 74% of private equity allocations by region. The next most important region is the U.S., which accounts for 16% of current private equity investment. Figure 5: Current private equity allocation by region of investment Asia 0% Europe 7% Non specific 3% U.S. 16% Australia 74% 3.2. Future allocation to private equity Overall By assets under management Survey respondents expect the percentage of total assets under management committed to private equity to remain fairly stable over the next 2 to 5 years (slight decrease from an average of 4.5% to an average of 4% in the next two to five years). This slight decrease is explained by a few funds not intending to invest further in private equity, and the remainder not increasing their allocations significantly. Australian study

8 By type of investment Fund of funds investment: Fund of funds will continue to account for half of the total allocation. Direct fund investment: Fund investments will continue to account for a third of the total allocation. Direct company investment: This type of investment is expected to decline shifting from an average of 20% of assets invested in private equity to 18%. Figure 6: Future private equity allocation by type of investment Direct 18% Single pool 32% Fund of funds 50% By region of investment According to this study, it would appear that there will be a decrease in the allocation to Australia of the current 74% to 65%. This will result in an increase in private equity allocations to other regions. The next 2-5 years will see an increasing commitment to Asia (from a current zero base to around 2%), an increase to Europe (from 7% to 8%), and the rest of the world from a current 3% base to around 13% of assets invested in private equity. Figure 7: Future private equity allocation by region of investment Non specific 13% U.S. 12% Europe 8% Asia 2% Australia 65% Australian study

9 By private equity segment According to the study, the most attractive private equity segments for investment over the next 2-5 years for Australian superannuation funds will be Australian buyouts (BO) and venture capital (VC). Figure 8: Attractiveness of private equity segments within the next 2-5 years Asia VC Asia BO Europe VC Secondary markets US VC Emerging markets Europe BO US BO Australian VC Australian BO most attractive least attractive Australian study

10 3.3. Other considerations when investing in private equity Objectives for private equity investment Objectives for private equity investment According to the study, the ability of private equity to increase relative returns is the most important reason for institutions investing in private equity. The institutions surveyed expect an average absolute return of 16.5% and an outperformance of public equity of 4.5% p.a. Risk reduction and diversification are other key reasons for investing in private equity. Non-financial objectives are of relatively low importance. Figure 9: Return expectations of private equity investments 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% +16.5% absolute performance +4.5% relative performance to listed equity Figure 10: Objectives for private equity investments within the next 2-5 years Non financial objectives Corporate objective Annual positive returns Risk diversification Relative return increment most important least important Australian study

11 3.3.2 Benchmarks for private equity investment Benchmarks for private equity investment When it comes to measuring returns, most of the superannuation funds surveyed preferred to use the ASX200/300 index which is consistent with the majority of the assets being within Australia and their objective being to increase relative return. Quite a few respondents used multiple benchmarks, which may reflect their allocation policy by region. Figure 11: Benchmarks for private equity investments Other 24% S&P500 24% MSCI 32% ASX200 76% 0% 10% 20% 30% 40% 50% 60% 70% 80% Australian study

12 4. SECONDARY FINDINGS 4.1. The investment decision 35% of respondents indicate their trustee board was the primary party responsible for the management of private equity investments. 27% of respondents indicated that they had a CIO, who was the primary responsibility for management of private equity investments. However, as many as 8% of the companies contacted do not have a dedicated private equity specialist and the responsibility for private equity investment tends to lie with a generalist fund manager. Figure 12: Responsibility for private equity investment decisions No definition 4% In house 8% CIO 27% Trustee/board 35% 0% 5% 10% 15% 20% 25% 30% 35% 40% Australian study

13 4.2. Key criteria for private equity investment Investing through a single pooled fund For superannuation funds investing through pooled funds that were not a fund of funds, the most important criteria for selecting a fund manager relates to their technical skills as managers (previous experience, track record and industry experience ranking the most important on average). Customization, image, and brand recognition as well as co-investment opportunities are not seen as important. Figure 13: Important selection criteria for single pooled fund investments in private equity funds Image Sparring partner Customisation Co investors Reporting Governance Terms Transparency Other Team Track record Value added Financials Industry knowledge Manager track record Operational most important least important Australian study

14 4.2.2 Fund of funds investments When it comes to selecting fund of funds, the same criteria generally apply, although, in addition, the ability of fund of funds managers to gain access to premier funds is an important aspect. Figure 14: Important selection criteria for investments in fund of funds Sparring Image Co investors Customised products Reporting Governance Terms FoF track record Transparency Operational experience Financials Current network Industry experience Manager record most important least important Australian study

15 4.3. Barriers to investing in private equity For respondents, the main barriers to private equity investing were fees charged and are illiquidity. Figure 15: Risks and hurdles associated with private equity investments Internal issues Know how Default Reporting Time involvement Tranparency Long term commitment Illiquidity Fees high risk/hurdle low risk/hurdle The respondents believed that they could reduce the risks associated with private equity investing by achieving diversification through an increased number of investments and investing across different stages of private equity investment cycles. Figure 16: Risks reduction associated with private equity investments Use of funds Internal knowledge International diversification Work with advisors FoF Industry diversification Differnent stages Diversification of number investments high risk low risk reduction reduction Australian study

16 Contact for further information: Bruno E. Raschle Managing Director Peter Laib Managing Director Stefan Bannwart Head of Corporate Communications Adveq Management AG Affolternstrasse 56, 8050 Zurich Switzerland John R. Evans Associate Professor, School of Banking & Finance Associate Professor, Actuarial Studies Unit Academic Director, Master of Finance Program Faculty of Commerce and Economics The University New South Wales Sydney NSW Australia Australian study

17 Survey of Australian Institutional Attitudes to Private Equity Investment with European (ex UK) Comparisons

18 The Objective To gain an understanding of the main drivers for institutions to invest/ disinvest in private equity

19 Support and Authorship Sponsored by Adveq, a Zurich based private equity fund of funds manager Australian survey by John Evans, UNSW European survey by Johan Ginyard,Stockholm School of Economics

20 The Data Australia: large superannuation funds, with 40 respondents, $A120 billion of assets Europe: pension funds, insurers, 106 respondents, $EUR 300 billion of assets (est)

21 Current Allocations: Australia over 5.0% 26% up to 5.0% 45% up to 2.0% 13% up to 1.0% 10% up to 0.5% 6% 0% 10% 20% 30% 40% 50%

22 Current Allocations: Europe over 10.0% 19% up to 10.0% 5% up to 7.5% 9% up to 5.0% 23% up to 2.5% 9% up to 2.0% 5% up to 1.5% 14% up to 1.0% 0% up to 0.5% 16% 0% 5% 10% 15% 20% 25% 30%

23 Current Investment Medium: Australia Direct 20% Fund of funds 48% Single pool 32%

24 Current Investment Medium: Europe Fund of funds investment 14% Direct fund investment 58% Direct company investment 28%

25 Current Country Allocation: Australia Europe 7% Asia 0% Non specific 3% U.S. 16% Australia 74%

26 Current Country Allocation: Europe R.o.W. 4% U.S. 21% Europe 75%

27 Future Allocation Australia: stable at around 4.5% of FUM Europe: stable at around 3.4% of FUM

28 Future Investment Medium: Australia Direct 18% Fund of funds 50% Single pool 32%

29 Future Investment Medium: Europe Direct fund investment 54% Fund of funds investment 28% Direct company investment 18%

30 Future Country Allocation: Australia Non specific 13% U.S. 12% Europe 8% Asia 2% Australia 65%

31 Future Country Allocation: Europe 80% 70% 74% 65% 60% 50% 40% 30% 20% 10% 0% Europe Europe future 21% U.S. 26% U.S. future 1% Asia 5% 4% Asia future Rest of World 9% Rest of World future

32 Future Allocation by Type of Investment: Australia Asia VC Asia BO Europe VC Secondary markets US VC Emerging markets Europe BO US BO Australian VC Australian BO most attractive least attractive

33 Future Allocation by Type of Investment: Europe Acquisition of secondary positions Investments in emerging markets European development/growth/buyout investments European venture capital investments Asian development/growth/buyout investments Asian venture capital investments Domestic development/growth/buyout investments Domestic venture capital investments U.S. development/growth/buyout investments U.S. Venture Capital investments Unattractive Attractive

34 Investment Return Objectives Australia: absolute return of 16.5%pa, relative return of 4.5%pa Europe: absolute return of 12%pa, relative return of 4%pa

35 Investment Drivers: Australia Non financial objectives Corporate objective Annual positive returns Risk diversification Relative return increment most important least important

36 Investment Drivers: Europe Unimportant Very important Reaching an annual positive return over the entire period of the commitment 3.5 Increase of the relative return 4.2 Risk diversification and reduction 3.8 Corporate objectives 2.5 Non-financial objectives 1.6

37 Managing the Investment Australia: predominately trustee decision and management (with asset consultant) Europe: In over two thirds of the Nordic institutions surveyed, the CIO (Chief Investment Officer) or a dedicated Private Equity Officer is responsible for the investment decision.

38 Single Pool & FoF Investment Criteria Image Sparring partner Customisation Co investors Reporting Governance Terms Transparency Other Team Track record Value added Financials Industry knowledge Manager track record Operational most important least important

39 PE Barriers: Australia Internal issues Know how Default Reporting Time involvement Tranparency Long term commitment Illiquidity Fees high risk/hurdle low risk/hurdle

40 PE Barriers: Europe Reporting and Corporate Governance 3.1 Effort to convince internal committees (e.g. board of directors) 3 Management time and resource consumption 3.6 Lack of own knowhow 3.4 Long-term commitment 3.4 Risk of default 3.2 Lack of transparency 3.6 Illiquitdity Unimportant Important

41 Conclusions: why invest? Return enhancement for the investor remains the dominant reason for investing Diversification is also another important driver

42 Conclusions: Barriers to investing Predominately illiquidity issues Europeans also see management time involvement as a serious issue Australians don t like the fees

43 Conclusions: How to invest Fund of Funds remains the dominant Australian investment medium, but Europeans prefer single pooled funds A manager s track record, ie performance, remains the main selection criteria

44 Conclusions: where to invest Investors are holding private equity investments at around the 3%-5% levels Own region remains the dominant target for investment, but with increasing interest in Asia Buyout situations remain the most interesting type of investment

45 Issues What are the implications for economic development of the investor attitudes? What should governments do to change the attitude (assuming they want to)? What results will investors actually get?