Australia's private equity sector is attracting more critics by the day.
Russell Investments this week reportedly told its clients not to invest in private equity, and fund managers remain wary about investing in private equity-vended initial public offerings (IPO).
Russell's 2012 model portfolio recommended a zero allocation to private equity, principally because of liquidity issues in unlisted investments.
Higher fees in private equity funds are another issue for some funds.
Even so, Australia seems to be going against a global trend of pension funds allocating more money to private equity funds with the aim of bolstering overall fund returns.
Russell's view is surprising given the performance of private equity fund exits in recent years.
The Australian Private Equity and Venture Capital Association (AVCAL) studied 130 full or partial divestments of 102 companies between 2009 and 2011.
AVCAL provided the July 2012 research "Australian Private Equity Exit Activity" to its members, and this week released it exclusively to Investor Weekly.
The research said: "Despite turbulent global economic conditions, exits by Australian PE (private equity) funds between 2008/09 and 2010/11 did very well on average across all sectors. For all exits where performance data was available, the average IRR (internal rate of return) was 40 per cent."
AVCAL found the total divestment of private equity investment at cost and proceeds amounted to $3.7 billion and $5.7 billion respectively over the sample period.
So as asset consultants recommend against private equity, the local sector is performing reasonably well, according to its industry body.
But that may not convince superannuation funds that are concerned about high fees, lower liquidity from unlisted investments, and the potential for higher volatility in private equity returns.
The poor perception of private equity-vended IPOs is another problem for the sector.
The weak share price performance of IPOs such as Myer Holdings, Kathmandu Holdings and Collins Foods since listing has many fund managers avoiding such offers.
Less interest in private equity-owned IPOs makes it harder for private equity funds to use share-market floats to exit their investment.
Consequently, more private equity-vended IPOs are expected to change their offer structures to address market concerns.
Calibre Group, which this week listed on the Australian Securities Exchange through a $75-million offer, had an unusual IPO structure that may become a template for others to follow.
A United States private equity fund, First Reserve, agreed to a voluntary escrow for its 60.9 per cent stake in Calibre (at listing) until its first full-year accounts as a listed company are lodged in the second half of 2013.
Also, there was no general public offer for the Calibre IPO.
It is unusual for a private equity fund to keep its shares, rather than sell all or some of them, during a float.
Private equity firms clearly have to structure their IPOs more attractively - and hold their shares longer - to win the support of local fund managers.
With several large IPOs in the pipeline for the second half of 2012, depending on market conditions, investors may face more US-style floats, where existing shareholders sell down a much smaller percentage in the offer and hold their shares longer.
That, at least, ensures their interests are better aligned with new investors in the float.
Only four private equity-backed companies were exited via an IPO between 2009 and 2011, AVCAL found.
The other 96 per cent of private equity exits were through mechanisms such as trade sales, secondary private equity buyouts, a sale at a nominal price or write-off, or by other means.
AVCAL last year examined the performance of private equity-backed versus non-private equity-backed IPOs.
It found there was little evidence that private equity-backed stocks had poorer post-listing performance than other IPOs.
In fact, private equity-backed IPOs may perform better, on average, over longer periods.
That will provide little solace for funds that were early investors in a string of dud private equity-owned IPOs over the past few years.
But it is at least a reminder that every investment - and asset class - should be treated on its merits.
