Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Performance keeps Australia in alternatives game
Australia remains tiny on a world scale for alternative investments, with just 1-2 per cent of the global market, despite having consistently good performance, particularly among private equity players. This is the view of Mark O’Hare, the founder and chief executive of Preqin.
Speaking to more than 450 investors and managers in Australia and New Zealand via webinar last week (October 28), O’Hare, who oversees possibly the largest database of global research on alternatives, said Australian general partners (GPs) were “very attractive” to overseas investors because of their performance track records. “Investors continue to issue a significant volume of RFPs which are open to Australian managers,” he said. “North America and Asia are open for business.”
The median net IRR for private equity (PE) in North America, including venture capital, was about 12 per cent, with a standard deviation of 9-10 per cent. Australian returns were very good, at nearly 13 per cent with lower risk – a standard deviation of about 8 per cent. Hedge funds were less favourable in Australia versus globally, he said.
Preqin, which was established in 2003 in London, opened an office in Sydney early this year. It is headed up by Reuben Collins, who had serviced Australia and New Zealand as head of sales from Singapore for a year, and previously serviced EMEA from London. O’Hare said Australia was very important to the firm.
“It’s a remarkably resilient economy and the world is as global as ever, maybe more so for alternative investments. It’s important both as a destination and a source of capital. That’s why we made an investment in the office in Sydney, to be closer to the market and to help better understand the data. Sydney, Dubai and Frankfurt are our newest offices.”
All private capital asset classes combined, including hedge funds, had increased their assets under management three-fold to US$10.1 trillion over the past decade, he said. By 2025 the total would be more than US$15 trillion. There was no decline in the number of funds seeking capital. By contrast, Preqin tracks 601 Australian alternatives managers handling US$111 billion.
“There are more funds than ever,” O’Hare said. “There are currently 5,765 funds seeking US$1.7 trillion… The amount of capital seeking has flatlined, though, since the beginning of the year but a lot of this was due to closures among some of the big funds (in their final raisings).”
For limited partners (investors, known as LPs in private markets), “they are sticking with the program”, he said. According to the latest work from Preqin on short-term intentions globally, 63 per cent report no change in their commitments to alternatives, 14 per cent report a slight decrease, 7 per cent a significant decrease, 5 per cent a significant increase and 11 per cent a slight increase. “It’s by no means a blood bath,” he said.
Over the longer term, the same proportion report no change but 63 per cent say they intend to invest significantly more. This is a familiar pattern for the Preqin researchers. “LPs were telling us much the same thing in 2009 during the GFC,” O’Hare said. “There’s a difference with investors showing some anxiety [in the short term] but a lot of confidence in the longer term.”
In terms of the number of pools of capital, North America comfortably leads the world with 6,547, compared with 2,935 in Western Europe, 2,504 in Asia Pacific and 287 in Australia. A sample of the top investors in Australia includes: AustralianSuper, HostPlus, UniSuper, CSC, ROC Partners, Sunsuper, Tasplan, WA Super, MLC and Australia Post’s super fund.
Last week’s webinar was Preqin’s first for an Australasian audience. It was organised jointly with the Australian Investment Council and included a panel session with John Morris of HarbourVest, Mounir ‘Moose’ Guen of MVision PE Advisers and Will MacAulay of HESTA.
Guen said that there was already a flight to safety before the pandemic hit, which meant that investors tended to be US heavy and mega-fund heavy. “There was a real sensitivity to capital protection, so very little extra volume for smaller funds,” he said.
Morris said that Australia was one of the countries which his firm thought of as promising. “We think we are being well rewarded with consistency of performance. We started to invest in Australia in 1996 and have had a steady allocation since. We have seven relationships and would like to expand that.”
MacAulay, HESTA’s genral manager of unlisted assets, said his super fund had not been “pushing money out the door” recently but most of its partners were well-funded from raisings “a couple of years ago”.
He said most funds had constraints on liquidity and fees, both of which are highly relevant for alternatives mandates. “Funds with larger scale can deal with the complexity… I think we are seeing a bifurcation where the growth is coming from a smaller group of investors becoming more active.” On the climate generally, he said: “The global return environment for pretty much everything has been horrible. At the end you have this little asset class which is consistently delivering great returns. Why wouldn’t you increase your allocation?”
Evidence of big investors not wanting to miss out on the next big thing to emerge from private equity and venture is that there has been a general rise in co-investments in all markets. Guen estimated that between 70-80 per cent of US investors were co-investing. This gave them a front seat for later rounds of capital raising and perhaps other investing opportunities from the same GP.
