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How ACS’ ‘leap of faith’ helped build UniSuper’s new mandate

UniSuper’s mandate to Revolution Asset Management shows how important private debt is becoming to super funds as their member base matures. It also has its roots in the merger with Australian Catholic Super.

UniSuper’s mandate to specialist private debt manager Revolution Asset Management is a sign of things to come for superannuation, according to Revolution CIO Bob Sahota (top left), with a member base that increasingly needs to be insulated against the volatility of public markets.

“This will become a very regular and normal piece of asset allocation going forward,” Sahota says. “There’s an aging population and people are moving into retirement. This love affair with equity markets we have in this country is going to reduce; these people can ill-afford the volatility in those markets as they have to draw pensions and reduce their super balances.”

“It’s okay if you’re young and have a very long-term horizon, but if you’re at retirement and need to start drawing down on your savings then this product is perfect for them. That’s why I think this is becoming a more interesting and growing piece of the asset allocation. And it’s going to grow as compulsory super compounds up.”

Revolution’s history as a firm is intertwined with Australian Catholic Superannuation (ACS), which was absorbed by UniSuper in last year’s merger. ACS wanted to get into low-risk Australian private debt and considered Sahota and other Revolution founders safe hands; they had initially tried to establish the product at Kapstream, before tying up with Channel Capital. ACS were Revolution’s first seed investor, pledging an initial $50 million to the fund, with Sahota promising in turn not to take the money until Revolution had picked up $200 million in aggregate.

“We wouldn’t be here today without (ACS CIO) Michael Block and (ACS private markets manager) John Phokos… They backed us before anybody else.”

ACS introduced Revolution to UniSuper prior to the merger last year; while UniSuper cut a number of ACS’ managers and positions in more liquid markets, Revolution was instead put through a period of “exhaustive” due diligence.

“In my career, I’ve never been through a more thorough process. (UniSuper) don’t do anything lightly, and I think it’s a big milestone for our business to get a client that is as bluechip as UniSuper… This asset class has become more attractive because it’s floating rate, and every investment is secured should we get into a period where there’s a slowdown in the economy. And it offers genuine diversification.”

“In Australia, in public markets in growth equity and fixed income, it’s hard to be differentiated away from a high concentration in banks and financials. We provide access to industries, businesses and sectors that don’t normally get represented in those markets… The DNA of our firm is to deliver non-correlated, boring, stable income that aims to be four or five per cent above the RBA cash rate at any time.”

In some ways, Revolution AM also represents a disappearing industry dynamic – that of superannuation funds being the main backers of new managers. ACS made the economics of investing in new managers work by negotiating “very good” cornerstone fees.

“When I look back nearly five and a half years ago, when we started, there were a lot more smaller super funds who were prepared to take a chance on a new manager,” Sahota says. “It was still a leap of faith for anybody who was going to back a start-up – clearly you’re not at profitability until you get to a critical mass, and then what level of allocation do you want to give to a new manager in the whole scheme of things?

“Today, would anybody get out of bed – if you’re a very large fund – for anything less than $300-$500 million? Nobody’s going to chance that on a new manager. Certainly not a $50 million cornerstone, which was started with ACS. That’s going to be the barrier to entry for any new strategies going forward, which is sad… that entrepreneurial spirit and innovation that (Michael Block) showed is sadly not that prevalent in today’s world.”

Pictured: Revolution AM founders (left to right): Bob Sahota, David Saija, Simon Petris}

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