Last year a big super fund, Aware Super, shocked the M&A market in Australia with a surprise bid for a listed company, OptiComm. It signalled a new era in competition among players at the big end of town.
It was the first time a super fund had tried to buy a whole listed company in Australia, with Aware bidding $600 million for the telecommunications company in September last year. While the fund lost the ensuing tussle with competing bidder Uniti, which had made the first offer in June, it prompted a lot of speculation about what other big super funds were also capable of in a market which they had largely left alone until then.
Introducing the topic of super funds and the listed M&A market at an M&A conference last week (September 8), Chelsey Drake, a partner at law firm Allens, said Aware had only recently merged with VicSuper (and WA Super) and made its bid “without a manager” as a partner. It was the first time, and it was solo.
Speaking for the institutional investors were: Mark Hector, Aware’s senior portfolio manager for infrastructure and real assets; Shaun Manuell, AustralianSuper’s head of Aussie equities; Ashley Barker, executive director for infrastructure at IFM Investors; and, Ani Satchcroft, executive director of Macquarie Infrastructure and Real Assets (MIRA). Also on the panel was David Eliakim, a partner at King & Wood Mallesons who specialises in M&As.
Hector (pictured above) didn’t seem to think his fund’s bid was such a big deal. He said: “We decided to challenge ourselves last year, during the first lockdown. We undertook the research and had a crack. It was a digestible size for us. We’d already had experience with a couple of unsuccessful bids with consortium partners. And we were comfortable in doing it ourselves. We had expert legal and other advisers (including Macquarie).”
With respect to the OptiComm bid, he said that after completing its due diligence, Aware thought that the original bid had undervalued the company by 30 per cent, so a purchase represented good value. But the fund remained disciplined and walked away when the price got too high.
It didn’t stay away from the M&A market though, joining with Macquarie’s MIRA in a successful bid for Vocus this year, a much bigger telecommunications company, for $3.5 billion.
Hector said that reputation was critical to Aware and the fund was concerned to behave appropriately from a moral standpoint as well as legal.
“We may struggle to partake in what are perhaps dirty media tactics that you sometimes see,” he said. “We’d certainly prefer friendly bids.”
Asked about the scale benefits afforded big super funds, which would only get bigger, IFM’s Ashley Barker said that there had been a “fantastic increase in the scale and sophistication” of funds.
“Scale is without a doubt good for members but on the other hand government regulation can potentially stifle innovation [in investments] by encouraging funds to hug the index. The [Your Future Your Super] performance test has an extraordinary penalty on the downside,” he said.
“M&As are a different sort of investment. They are a high-conviction play. They require systems and processes and sophistication – which big funds have – to do them well.”
King & Wood Mallesons’ David Eliakim was also critical of APRA’s implementation of the performance test. “It’s a quite extraordinary situation under their ranking system,” he said.
“Fund have to write to members, in a certain fashion, and tell them that they should consider another fund. I can’t think of any other area where companies have to do that. I think the jury is still out whether this will lead to more mergers. As funds become bigger it becomes harder to outperform the market. That’s a countervailing force,” he said.
“Bigger funds [involved in M&As of listed companies] means there are more competition issues. There will be more ACCC challenges and more anti-trust challenges abroad. Super funds will become king makers as the get bigger and will largely drive M&A deals.
“They have different aims, too. They don’t necessarily want to take cash off the table. This may mean restructuring the usual way of doing deals.”
On the other hand, super funds made very good long-term partners, he said. “Super funds offer a long-term vision that private equity doesn’t necessarily offer. Super funds have signed up for lock-ins for five and more years that others might struggle with. That’s very attractive for boards and management.”
They also had an advantage from a regulatory point of view, for instance, when it came to the Foreign Investment Review Board. They could persuade targets that they should proceed with them rather than an overseas fund or a competitor company because there would be no regulatory overlay.
AustralianSuper’s Shaun Manuell said that the next step for funds, as their pools of capital grew, were to go overseas with their knowledge. “How we think about the global market is an important next step for the industry,” he said.
Super funds also had cultural differences from other investors in the market which were of benefit in the M&A market. These included flexibility and maturity.
Funds tended to be flexible compared with fund managers who are confined by asset class mandates, for instance. “We just focus on returns and can look at everything,” he said.
MIRA’s Ani Satchcroft said that with the public M&A market there was an element of needing boards and management to believe in your, the bidder’s, credibility that it could follow through with the investment, including the ongoing ownership mand stewardship.
“It’s important to be able to say: ‘we are going to treat the asset responsibly’ and to be able to assure the staff and employees that they’ll be joining a larger family would be an advantage.”
While some concerns have been raised about the growing economic power of super funds, especially with respect to listed companies, IFM’s Ashley Barker said the data did not support those concerns.
“There are about 500 companies in the All-Ordinaries worth about $2.5 trillion but there have only been a handful of takeovers [by funds]. It’s hardly a tidal wave,” he said.
“I believe the opposite is true. Because of their scale and sophistication, they won’t just be buyers in the future,” he said of the big funds. “They will sell, they will recycle, they’ll trade. They will be participants across all facets of public and private markets,” he said.