Hartley Rogers, chairman of Hamilton Lane, which oversaw $36 billion of investments into private equity funds and other alternative asset classes last year.
By Anthony Macdonald and Sarah Thompson
Better data and investment analytics tools should see more superannuation funds flow into private equity funds and directly into leveraged buyouts in the near future.
That's the view of Hartley Rogers, chairman of the firm that oversaw more investments into private equity funds last year than anyone else globally, Hamilton Lane.
Mr Rogers says defined contribution superannuation funds – which account for the bulk of Australia's $2.2 trillion retirement savings pool – have historically struggled to allocate large portions of their portfolios to private equity because they need to be able to price their funds at short notice and enable clients to switch between managers and/or strategies.
At the same time, private equity managers typically seek 10-year commitments and invest into illiquid assets, which are hard to value regularly.
However, Mr Rogers says data and analytics improvements should help bridge the gap. And it should also open up the private equity industry to ultra-high-net-worth investors.
"Private equity has been somewhat restricted [as an asset class] because data has been so hard to come by," Mr Rogers told The Australian Financial Review in an exclusive interview.
"That's all changing. We have made an enormous investment in data technology and we believe that is going to impact private equity in a very big way."
Australian superannuation funds have about 2 per cent allocated to private equity. It's a much smaller allocation than in markets dominated by defined benefit pension plans, which have different needs and can have 10 to 20 per cent of their funds in private equity.
'Private equity firms now have to add value to the companies'
Improving data and analytics is one of the big trends that will shape private equity globally and in Australia in coming years according to Mr Rogers, whose firm oversaw $US28 billion ($36 billion) of investment into private equity funds and other alternative assets last year, representing about 5 per cent of fund flows.
Hamilton Lane's clients include local heavyweights The Future Fund, AustralianSuper and EnergySuper, either advising on private equity allocations or helping them manage their private equity programs via data analytics and other back office support.
Mr Rogers says other trends include the rise of co-investments – where superannuation funds and other private equity investors invest directly into leveraged buyouts alongside a private equity manager – enabling bigger buyouts, changing fee structures and the re-emergence of European funds.
"Co-investments are a huge part of the private equity market; before co-investments there were club deals, many of which ended badly because no one fund controlled the company," Mr Rogers says.
"The key to private equity is aligning incentives – private equity firms now have to add value to the companies. Way back in the stone age you could just put leverage on the companies and you could make the maths work by leveraging it up. That doesn't work any more – it's more equitised and now to earn the returns, you need to add value."
Fees also weigh heavily on Australian superannuation funds' mind. Private equity managers typically charge much higher fees than other parts of a pension funds' program, such as fixed income, equities or real estate.
But Mr Rogers says private equity firms are changing fee structures. While the headline "two and 20" or "1½ and 20" may remain, firms are changing other parts of the equation including deal fees, hurdle rates and offering upfront discounts for being in a raising's first close.
"It's about discounting is what I would say – the devil is in the detail," he says.
"It hasn't become as cheap as people want, because the market has been so strong – the good GPs [private equity fund managers] can raise a lot of money a lot more quickly than others. But there is change."