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Super funds called to increase private equity exposure

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Private equity investments appear to be weathering the impact of COVID-19 across multiple sectors and geographies according to a new study by Willis Towers Watson, with the group recommending super funds to increase their allocations to the asset class.

The survey was conducted in April across 36 private equity funds globally, representing more than 300 portfolio companies, to understand how businesses were coping through the pandemic. 

The results revealed that significant turmoil in capital markets has had little effect on the capital structures of portfolio companies, with 87 per cent of respondents indicating their holdings were unlikely to breach covenants as a result.

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Around 13 per cent said holdings were either close, or likely, to breach covenants in the next two to three months. 

Dania Zinurova, director of manager research, Australia at Willis Towers Watson noted the survey showed there was little evidence of forced exits by private equity firms into a distressed market, which “preserves the future returns to investors”. 

On customer demand for products or services, 46 per cent of respondents reported their holdings were feeling a medium to high impact from the slowdown in global economies, mostly within the consumer discretionary, industrials, energy and materials sectors. 

In contrast, sentiment among commercial services firms remained robust, while 20 per cent of consumer staples firms reported a positive impact on demand. 

The impact on businesses’ supply chains and their own internal operations also remained small, with around 80 per cent of respondents showing low levels of concern on either point. Willis Towers Watson said it indicated most private equity-held businesses effectively implemented alternative working arrangements.

“Private-equity owned companies have some structural advantages that allow them to navigate crises better,” the Willis Towers Watson report stated.

“They have access to high-quality expertise [from] managers, access to equity and debt capital from their sponsors, and active owners that are well aligned to business success.”

According to APRA data from March, 4.6 per cent of superannuation fund assets are invested in unlisted equity. 

Ms Zinurova commented with more traditional asset classes being challenged, there is room to allocate to return-seeking classes such as private equity.

She added liquidity is another factor to consider for funds. 

“Given the early release of super initiative, many funds started adjusting their investment portfolio weights to manage the liquidity at the right level,” Ms Zinurova said. 

“APRA data for the March quarter indicates that its regulated funds increased their allocation to cash from $184 billion at the end of the December quarter to $236 million at the end of March. This increased allocation to cash was largely matched by a decrease in fixed interest investments from $412 billion to $367 billion.”

The changes will have had some impact on fund returns, she said, with running yields on Australian government bonds being between 0.5 to 0.9 per cent per year, compared to cash rates of around 0.1 per cent. 

“This shows that there is an increased pressure on the superannuation industry both in terms of liquidity but also in terms of the financial returns to members,” Ms Zinurova said.

“It is therefore even more important now to use the available illiquidity budget to allocate into asset classes that can better withstand crises such as COVID-19 and also deliver strong returns.”

The Willis Towers Watson research has indicated sectors such as technology, healthcare and consumer staples offer attractive opportunities from the entry pricing perspective and with “strong” tailwinds driving the segments.

The report noted with deal volumes depressed, there is less competition for opportunities and potentially better entry pricing.

 

Super funds called to increase private equity exposure
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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