Mega fund AustralianSuper said it is still feeling the pain from its very public loss in US software company Pluralsight and even with $341 billion assets under management, a $1.1 billion write-down is still too big a chunk of money to let go easily.
But at the Investment Magazine Fiduciary Investors Symposium, AustralianSuper senior portfolio manager of private equity, Robert Schnittger, said the most important thing now is to learn the lesson and “not lose money the same way twice”.
This failed investment by AustralianSuper came under the spotlight in August after private credit lenders, led by Blue Owl Capital and Ares Management, took ownership of Pluralsight. The group valued Pluralsight at US$900 million, which means that its original owner Vista Equity Partner and co-investors lost approximately US$4 billion in the handover.
AustralianSuper is an investor in Vista and was also a co-underwriter in the Pluralsight acquisition.
“I think everybody in this room who’s an investor has had their share of humbling experiences from an investment perspective,” Schnittger told the symposium in Healesville, Victoria.
“Things don’t always work out as planned, no matter whether it’s 10 million, 100 million or a billion [dollars] – that still hurts.”
Schnittger said after the experience, the fund realised even more the importance of due diligence in choosing partners that can deliver consistent and persistent returns and create value.
“One of the potential impacts of a wide dispersion of returns with a co-invest [or] co- underwrite portfolio is that you can have potentially a higher dispersion or higher loss ratio than the underlying fund, so that’s something that we very much focus on in our diligence and underwriting of the partners,” he said.
AustralianSuper will continue to increase it private equity allocation in the next few years, but Schnittger acknowledged the fund is fortunate enough to be blessed with positive asset inflows, whereas many other LPs are “waiting for their cash to recycle” before committing to new funds.
“In some cases, the LPs have lent over the skis a little bit too much in terms of their allocations during the early years of the 2020s, and suffered a bit of a denominator effect, which meant they became over-allocated, coupled with a lack of…distributions per capital paid because of a tough exit environment,” he said.
“So, we’re in a fortunate challenge [which is] probably not having good enough gatekeepers, and [we] get a huge amount of calls from people looking to try and extract the dollar.”
AMP Super chief investment officer Anna Shelley said the fund is aiming to keep its private equity program “steady” but it’s being hampered by uncertainties around distributions. AMP Super has an overall neutral to negative cash flow.
“The distributions haven’t been there and aren’t projected to be there for another 12 to 18 months, so we’re in a bit of a pause as a consequence,” she said.
Instead of private equity, Shelley said AMP Super is looking across the liquidity spectrum such as private debt and infrastructure, and especially where asset classes start to cross over with each other.
“They tend to come at a slightly lower fee, and they tend to come [with] probably not quite as good returns, but they do have a more liquid aspect for that.”
JANA head of superannuation Stewart Eager said super funds broadly allocate 3 to 5 per cent to private equity while endowments which are less fee-conscious may push the allocation upwards to 10 per cent, but it’s hard for funds to model the weighting perfectly.
“Even changes in currency can change your weight quite a lot. If you’re allocating in US dollars and the Aussie dollar like 10 years ago, dropped from $1.10 [to USD] down to whatever, all of a sudden, your contributions that you’re going to get drawn down are a lot bigger than they were.”
PE hungover
Goldman Sachs Asset Management’s (GSAM) US-based chairman and co-head of global private equity Adrian Jones said private equity is “hungover” from the extraordinary conditions it enjoyed a few years ago, but the hardship of exits shouldn’t be taken as a sign that the industry is waning.
“It’s not just that 2021 was a great year for private equity in terms of monetisation and fundraising…but 2022 was the second-best year for monetisation, which is shocking, really, when you think about it,” Jones said.
“For the large funds, for the $20 billion to $30 billion funds, this is a tough time. It’s the size of companies they’re investing in, where they grow value and where they need to monetise that value.
“Broadly speaking, you really need a functioning public market as part of your monetisation process, and you haven’t had a functioning public market for over two years.”
Jones said there is still “inexorable appetite” for private equity in some parts of the world, the Middle East in particular, but much of the fundraising in the past 12 to 18 months is concentrated on a few larger platforms – which is not necessarily larger funds.
“[They are] platforms with more breadth, platforms with infrastructure to navigate complexity,” Jones said.
One of the key reasons is that for control investors like, the investment is “useless” unless they have the operational expertise to drive change, Jones said. GSAM itself has more than 100 operating executives for those engagements with portfolio companies.
“These teams are expensive…there’s negotiation going on with them as well,” he said.
“It has become an increasingly hard space for a $1, 2, 3 or 4 billion fund or complex with a single fund, so having a platform across which you can amortise the cost of things like this is becoming [essential]…you need complexity and breadth to deal with it.”
