Survey of Australian Institutional Attitudes to Private Equity Investment with European (ex UK) Comparisons

The Objective

To gain an understanding of the main drivers for institutions to invest/ disinvest in private equity

Support and Authorship

Sponsored by Adveq, a Zurich based private equity fund of funds manager

Australian survey by John Evans, UNSW European survey by Johan

Ginyard,Stockholm School of Economics

The Data

Australia: large superannuation funds, with 40 respondents, $A120 billion of assets

Europe: pension funds, insurers, 106 respondents, $EUR 300 billion of assets (est)

Current Allocations: Australia

6%

10%

13%

45%

26%

0% 10% 20% 30% 40% 50%

up to 0.5%

up to 1.0%

up to 2.0%

up to 5.0%

over 5.0%

Current Allocations: Europe

16%

0%

14%

5%

9%

23%

9%

5%

19%

0% 5% 10% 15% 20% 25% 30%

up to 0.5%

up to 1.0%

up to 1.5%

up to 2.0%

up to 2.5%

up to 5.0%

up to 7.5%

up to 10.0%

over 10.0%

16%

0%

14%

5%

9%

23%

9%

5%

19%

0% 5% 10% 15% 20% 25% 30%

up to 0.5%

up to 1.0%

up to 1.5%

up to 2.0%

up to 2.5%

up to 5.0%

up to 7.5%

up to 10.0%

over 10.0%

Current Investment Medium: Australia

Fund of funds 48%

Direct20%

Single pool32%

Fund of funds 48%

Direct20%

Single pool32%

Current Investment Medium: Europe

Fund of fundsinvestment

14%

Direct fundinvestment

58%

Direct company

investment 28%

Fund of fundsinvestment

14%

Direct fundinvestment

58%

Direct company

investment 28%

Current Country Allocation: Australia

Austra lia74%

N on specific3%

U .S .16%

Asia0%

Europe7%

Austra lia74%

N on specific3%

U .S .16%

Asia0%

Europe7%

Current Country Allocation: Europe

Europe75%

R.o.W .4%

U.S.21%

Europe75%

R.o.W .4%

U.S.21%

Future Allocation

Australia: stable at around 4.5% of FUM Europe: stable at around 3.4% of FUM

Future Investment Medium: Australia

Fund of funds 50%

Direct18%

Single pool32%

Fund of funds 50%

Direct18%

Single pool32%

Future Investment Medium: Europe

Fund of fundsinvestment

28%Direct fundinvestment

54%

Direct company

investment 18%

Fund of fundsinvestment

28%Direct fundinvestment

54%

Direct company

investment 18%

Future Country Allocation: Australia

Australia65%

Non specific13%

U.S.12%

Asia2%

Europe8%

Australia65%

Non specific13%

U.S.12%

Asia2%

Europe8%

Future Country Allocation: Europe

74%

65%

21%26%

1%5% 4%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Europe Europefuture

U.S. U.S.future

Asia Asiafuture

Rest ofWorld

Rest ofWorldfuture

Future Allocation by Type of Investment: Australia

1 2 3 4 5

Asia VC

Asia BO

Europe VC

Secondary markets

US VC

Emerging markets

Europe BO

US BO

Australian VC

Australian BO

most attractive least attractive

1 2 3 4 5

Asia VC

Asia BO

Europe VC

Secondary markets

US VC

Emerging markets

Europe BO

US BO

Australian VC

Australian BO

most attractive least attractive

Future Allocation by Type of Investment: Europe

2.6

2.5

2.8

3.0

2.5

2.5

2.8

3.1

2.9

3.0

1 2 3 4

U.S. Venture Capitalinvestments

U.S.development/growth/buyout

investments

Domestic venture capitalinvestments

Domesticdevelopment/growth/buyout

investments

Asian venture capitalinvestments

Asiandevelopment/growth/buyout

investments

European venture capitalinvestments

Europeandevelopment/growth/buyout

investments

Investments in emergingmarkets

Acquisition of secondarypositions

Unattractive Attractive

2.6

2.5

2.8

3.0

2.5

2.5

2.8

3.1

2.9

3.0

1 2 3 4

U.S. Venture Capitalinvestments

U.S.development/growth/buyout

investments

Domestic venture capitalinvestments

Domesticdevelopment/growth/buyout

investments

Asian venture capitalinvestments

Asiandevelopment/growth/buyout

investments

European venture capitalinvestments

Europeandevelopment/growth/buyout

investments

Investments in emergingmarkets

Acquisition of secondarypositions

Unattractive Attractive

Investment Return Objectives

Australia: absolute return of 16.5%pa, relative return of 4.5%pa

Europe: absolute return of 12%pa, relative return of 4%pa

Investment Drivers: Australia

Non financial objectives

Corporate objective

Annual positive returns

Risk diversification

Relative return increment

1 2 3 4 5

most important least important

Non financial objectives

Corporate objective

Annual positive returns

Risk diversification

Relative return increment

1 2 3 4 5

most important least important

Investment Drivers: Europe

3.5

4.2

3.8

2.5

1.6

1 2 3 4 5

Reaching an annual positive return overthe entire period of the commitment

Increase of the relative return

Risk diversification and reduction

Corporate objectives

Non-financial objectives

Unimportant Very important

3.5

4.2

3.8

2.5

1.6

1 2 3 4 5

Reaching an annual positive return overthe entire period of the commitment

Increase of the relative return

Risk diversification and reduction

Corporate objectives

Non-financial objectives

Unimportant Very important

Managing the Investment

Australia: predominately trustee decision and management (with asset consultant)

Europe: In over two thirds of the Nordic institutions surveyed, the CIO (Chief Investment Officer) or a dedicated Private Equity Officer is responsible for the investment decision.

Single Pool & FoF Investment Criteria

most important least important

Image

Sparring partner

Customisation

Co investors

Reporting

Governance

Terms

Transparency

Other

Team

Track record

Value added

Financials

Industry knowledge

Manager track record

Operational

1 2 3 4 5

most important least important

Image

Sparring partner

Customisation

Co investors

Reporting

Governance

Terms

Transparency

Other

Team

Track record

Value added

Financials

Industry knowledge

Manager track record

Operational

1 2 3 4 5

PE Barriers: Australia

Internal issues

Know how

Default

Reporting

Time involvement

Tranparency

Long term commitment

Illiquidity

Fees

1 2 3 4 5

low risk/hurdlehigh risk/hurdle

Internal issues

Know how

Default

Reporting

Time involvement

Tranparency

Long term commitment

Illiquidity

Fees

1 2 3 4 5

low risk/hurdlehigh risk/hurdle

PE Barriers: Europe

3.5

3.6

3.2

3.4

3.4

3.6

3

3.1

1 2 3 4 5

Illiquitdity

Lack of transparency

Risk of default

Long-term commitment

Lack of own knowhow

Management time and resource consumption

Effort to convince internal committees(e.g. board of directors)

Reporting and Corporate Governance

Unimportant Important

3.5

3.6

3.2

3.4

3.4

3.6

3

3.1

1 2 3 4 5

Illiquitdity

Lack of transparency

Risk of default

Long-term commitment

Lack of own knowhow

Management time and resource consumption

Effort to convince internal committees(e.g. board of directors)

Reporting and Corporate Governance

Unimportant Important

Conclusions: why invest?

Return enhancement for the investor remains the dominant reason for investing

Diversification is also another important driver

Conclusions: Barriers to investing

Predominately illiquidity issues Europeans also see management time

involvement as a serious issue Australians don’t like the fees

Conclusions: How to invest

Fund of Funds remains the dominant Australian investment medium, but Europeans prefer single pooled funds

A manager’s track record, ie performance, remains the main selection criteria

Conclusions: where to invest

Investors are holding private equity investments at around the 3%-5% levels

Own region remains the dominant target for investment, but with increasing interest in Asia

“Buyout” situations remain the most interesting type of investment

Issues

What are the implications for economic development of the investor attitudes?

What should governments do to change the attitude (assuming they want to)?

What results will investors actually get?