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Scale helps when negotiating private equity deals
There could be a renaissance in the private equity space as superannuation funds are increasingly using their scale to demand cheaper prices in a traditionally expensive asset class, according to Hamilton Lane chief investment officer Erik Hirsch.
Speaking at a BNP Paribas Investment breakfast, Hirsch said Hamilton have used their scale in private equity capital to drive fundamentally better terms for their clients.
Big investors like superannuation funds were increasingly getting better fee terms for private equity, Hirsch said.
"One crowd of investors are looking at their portfolios on a net returns basis and saying: 'I hate paying fees, but on a net basis, it's still delivering what I think it should'. There are others who are continually aggressive in trying to push the market," he said.
However, Hirsch warned there were serious headwinds on the horizon for private equity.
While investors had committed to putting funds into private equity, the partners in charge of spending the money hadn't done anything with it. That meant there was still an enormous overhang of uninvested capital in the private equity market which was pushing up pricing, he said.
The private equity sector wasn't spending the funds at a fast enough rate, Hirsch said.
There was $300 billion of capital spent by the private equity sector in 2011, but there were hundreds of billions more raised during the global financial crisis (GFC), he added.
The sector has been a very resilient provider of positive net cashflow exposure, Hirsch said.
Managers were both investing funds and providing distributions to clients during the GFC, he said.
Chief executive of the Australian Private Equity and Venture Capital Association (AVCAL) Katherine Woodthorpe questioned why investors are continually trying to use profits from a rising asset class such as private equity to support other parts of their portfolio that are losing value.
Private equity has recorded 5 per cent net returns in the last five years, according to AVCAL.
Because private equity fees were only paid on the amount of capital committed, the net results were not as wildly different over 10 years compared to listed equity, Woodthorpe said.
More funds for private equity are also being invested into Australia from Asia, she added.
Superannuation funds and funds of funds account for the largest amount of funds raised by private equity firms in Australia by nearly 50 per cent, according to AVCAL figures.
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