- The Cambridge Associates Australia Private Equity and Venture Capital Index generated a return of 12.5% a year over the 15 years to 30 September 2014.
- Private equity funds make their money when their investee companies are sold, either through a trade sale or an initial public offering on the stock market.
- Two pure private equity listed investment companies are ING Private Equity Access Limited (IPE) and CVC Limited (CVC).
Australia’s army of self-managed super funds (SMSFs) are constantly being told to diversify their asset allocation more widely, but some asset classes prove more difficult than others in which to achieve this. Private equity — investing in private companies that are not listed on a stock exchange — is a case in point. But just because it is difficult doesn’t mean it is impossible, or not worth exploring.
Private equity can certainly be a good investment performer: the Cambridge Associates Australia Private Equity and Venture Capital Index – which tracks 61 Australia private equity and 23 Australia venture capital funds) – generated a return of 12.5% a year over the 15 years to 30 September 2014, outperforming the S&P/ASX 300 Index, on 8.7% a year. Over one year, the index (known as the CA Australia Index) outperformed the listed equity market by a whopping 21.3%, 27% versus 5.7%.
The success stories
Private equity funds make their money when their investee companies are sold, either through a trade sale or an initial public offering (IPO) on the stock market. In this way, some massively successful stock market companies – such as JB Hi-Fi, Seek and funeral business Invocare – have come into being, as well as some not-so-successful ones, for example Myer, drilling services company Boart Longyear and heavy equipment rental company Emeco.
Recent floats coming out of private equity firms have included credit data company Veda Group, mortgage insurer Genworth, media intelligence company iSentia, media group APN News & Media and aged-care operator Estia. Accounting software business MYOB is expected to be next.
In theory, private equity suits super fund investment, because it is an asset class with a long-term investment timeframe. Certainly the nation’s quasi-sovereign wealth fund, the Future Fund, likes the asset class. At 30 September 2014, the Future Fund held $9.2 billion, or 8.8% of its assets, in private equity investments.
It is definitely not a short-term investment, because as the private equity manager makes its investments, performance is negative for a while, before it (hopefully) recoups all that, and more, on successful exit – the so-called “J Curve.”
In the meantime, there is no liquidity: investors are in for the long haul. All the while, the fees can be steep: the ‘2 plus 20’ structure usually applies, where investors pay 2% of committed (not necessarily invested yet) capital a year, plus a performance fee of 20% of any outperformance achieved above a nominated return threshold.
Access through listed investment companies
Private equity has been a difficult investment to get into in Australia: most funds are only for institutional or wholesale investors (who have net assets of at least $2.5 million). And if you need liquidity, the range of options is even more limited.
One way to give private equity investors a liquid alternative is the listed investment company (LIC) model.
ING launched Australia’s first listed private equity “fund-of-funds,” ING Private Equity Access Limited (IPE) in 2004, investing in16 Australian and New Zealand funds, run by 11 different managers. Since October 2013, the LIC has been known as IPE Limited.
Since inception, IPE has committed more than $126 million to private equity funds, but it stopped making new investments in 2009. The fund has invested in more than 120 companies, and exited more than 70 of these investments. Capitalised at just $44 million, IPE has never really got going in share price terms, but has returned 15% a year over the last five years and 16.4% a year over the last three years – however, it is down 6.9% over the last 12 months.
Another private equity LIC is CVC Limited (CVC), managed by the CVC Group, one of the Australian venture capital industry pioneers. Capitalised at $176 million, CVC has been an excellent performer on the stock exchange, generating total return (capital growth plus dividends) of 20.1% a year over the last five years, 26.6% a year over the past three years, and 24.5% over the last 12 months.
At the current share price of $1.475, CVC trades at a 6% discount to the most recent NTA figure, of $1.57: that means you can buy the portfolio for less than its value.
In June last year, private equity and alternative investment house Blue Sky Alternative Investments launched Blue Sky Alternatives Access Fund Limited (BAF) on the ASX, to invest in a range of alternative asset classes including private equity, venture capital, water assets (water entitlements and infrastructure), hedge funds and private real estate.
BAF is definitely not a ‘pure’ private equity LIC: at January 2015, 25.7% of the fund was held in private equity investments, made up of 19.4% in private equity and 6.3% in venture capital. It is early days yet for BAF, which is capitalised at $63 million: it has moved to $1.04, compared to pre-tax NTA of 96.4 cents.
Managed funds
Another way to access the asset class is through managed funds, like the Barwon Global Listed Private Equity Fund – the only Australian private equity fund with daily liquidity. The fund invests in listed private equity stocks on the world’s exchanges: it holds a portfolio of 15–20 stocks – chosen from a universe of more than 300 listed securities – and which includes global private equity giants such as KKR, Blackstone, Apollo and 3i. The fund’s investable universe covers all stages of private equity investing.
At 31 January 2015, the Barwon fund had returned 9.3% (before management fees, performance fees and other fund expenses) for the most recent 12 months, compared to 15.4% for the MSCI World Index. Over the two, three and five years, the Barwon fund out-performed the Index: over the five years, it generated 20.6% a year, versus 14.8% for the Index.
The catch there is that the Barwon fund is open only to wholesale clients, and has a minimum investment of $100,000, unless otherwise agreed.
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