Global private equity fund of funds group Pantheon says Macquarie Group’s decision to sell its fund of funds business should help Pantheon expand its operations in Australia.
Macquarie Investment Management Private Markets was the only player in the private equity fund of funds game with an Australian base. Macquarie sold the business last week to its top managers including Michael Lukin, Andrew Savage and Shaw Ng. The new owners plan to rename the business ROC Equity Partners.
“The phone hasn’t started ringing yet, but with the support of six offices around the world we do feel we are in the best position to pick up any clients that prefer to work with a global business,” Pantheon’s Hong Kong-based principal Alex Wilmerding said.
“Internationally there are other big international competitors in this space, but they don’t have established relationships in Australia.”
Macquarie Group’s decision to divest its private equity investment arm is consistent with a global trend that has seen a number of the big banks leave the industry to niche providers.
Pantheon is in partnership with more than 500 private equity firms globally, and invests in more than 1300 funds and almost 10,000 companies. The company has been investing in the Australian private equity industry for 12 years and holds limited partnerships in eight local PE firms.
OPENING FOR INSTITUTIONAL INVESTORS
The business model provides a vehicle for institutional investors, such as large super funds, to add private equity to their investment mix without having to enter direct partnerships with PE firms.
Mr Wilmerding refused to disclose which local firms Pantheon invests in, but he did express a preference for the smaller end of the market.
“We invest in big firms but like the mid-market best. It is an area that takes a lot more work to understand, meaning we can provide more value to clients,” he said.
Australian private equity firms that specialise in investing in medium-sized companies include Quadrant Private Equity, Ironbridge, Crescent Capital Partners, and Wolseley Private Equity.
If ROC Equity Partners loses clients in the transition to becoming a stand-alone boutique, the competition from Pantheon and others is likely to be tough, as the industry is fighting for a slice of a pie that is not growing.
SECONDARY MARKET TO GROW
“The allocation of institutional funds to private equity as an asset class has still not recovered after selling off heavily during the global financial crisis of 2008,” Mr Wilmerding said. “And many of those who are still invested are consolidating their exposures.”
Mr Wilmerding has seen the maturation of a secondary market overseas and he thinks a similar trend will be pivotal to the local private equity industry in coming years.
“Ten years ago only about 3 per cent of all money invested in private equity was turned over in the secondary market, now the turnover rate is close to 10 per cent,” he said.
The global secondary market for limited partnerships in private equity funds has blossomed over the past decade, rising from about $US2 billion in 2000 to over $US25 billion in 2013.
Pantheon has $US27.4 billion ($30 billion) in funds under management invested in the private equity industry around the world, with about a third of that invested in secondary market transactions.
“There used to be a stigma attached to secondary market transactions but that has gone, meaning the market is now more liquid,” Pantheon London-based partner Nik Morandi said.
The aftermath of the global financial crisis created nearly five years of poor market conditions for the private equity industry to divest assets. Private equity firms have had to keep many companies in their stable for longer than originally planned, and many of the institutional investors who invest as partners alongside them have grown impatient.
Private equity firm fund managers have control over who a partner can sell their stake to, so existing investors have an advantage.
For Pantheon, this increasingly creates an opportunity to top up on investments they like, by buying out co-investors at a discount.
Secondary market transactions have become more common in the United States and Europe and are now playing a bigger role in an increasingly sophisticated Australian private equity market, although one notable feature of the local secondary market is that sellers have not been as prepared to accept big discounts, Mr Wilmerding said.
A rush of secondary market deals could be triggered this year if, as expected, a number of private equity firms announce they are raising money for new funds, Mr Morandi said.
“Investors who want to support new raisings may have to exit existing stakes through the secondary market to free up the capital.”
Pacific Equity Partners is one major private equity firm that has already announced it is raising money for a new fund.
The Australian Financial Review