The Evolving Landscape Australia-Based LPs Face in Private Equity – December 2015

by Jie Xin Choo

  • 24 Dec 2015
  • PE
  • VC

As one of Asia-Pacific’s most developed economies, Australia is home to many of the region’s most prominent private equity investors. Preqin’s Investor Intelligence module on Private Equity Online tracks 959 Asia-Pacific-based LPs with an interest in the asset class, of which 112 are based in Australia. While this number places the country behind China (215) and Japan (204) in terms of the number of LPs, allocation figures paint a different picture; Australia-based LPs have committed at least $40bn to private equity, making them the largest contributor of capital to the asset class among regional peers. The following sections will detail the investment preferences of this leading group.

The make-up of Australia-based LPs is hardly surprising given their size and importance to the country’s financial system. Superannuation schemes form the majority (54%) of investors; though, superannuation plans have found themselves in a quandary in recent years over the enduring regulatory pressure regarding fees charged to members which, in turn, has resulted in an evaluation of the level of fees paid to GPs. While the debate in relation to the 2/20 fee structure has been longstanding, private equity in general sufficiently outperforms traditional asset classes, such as stocks and bonds, and thus justifies the higher costs. Nevertheless, given the magnitude of influence superannuation schemes hold, fund managers could do well to weigh these concerns when attempting to secure future capital commitments. Asset managers are the second most numerous investor type, constituting 14% of the Australian investor pool.

Geographically, a strong home bias is displayed by Australia-based institutional investors. Ninety-one percent of firms have exposure to Australasia, which far exceeds the proportion of LPs that have a preference for other regions including North America (63%), Europe (62%) and Asia (55%).

Many countries, including the UK and Singapore, are undertaking measures to establish themselves as innovation hubs in a bid to foster competitiveness, as wells as aiming to develop new industries that can serve as engines for future economic growth – Australia is no exception. Vibrancy in the start-up scene is essential for innovation to thrive and although 71% of Australia-based LPs favor buyout vehicles, several factors could potentially tip the scale in favour of venture capital, which is a strategy preferred by 68% of investors. A number of proposed changes in government initiatives could encourage further investment in Australia’s venture capital industry. Early in December, the Australian government announced several new amendments that are slated to take effect from 1 July 2016 to both the Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Venture Capital Limited Partnerships (VCLPs) programs. These changes include a 10% non-refundable tax offset on capital invested during the year for LPs in ESVCLPs. First recommended by the Board of Taxation in 2011, more domestic investors could also come on board as Australian managed investment trusts will be allowed to commit capital to ESVCLPs and VCLPs.

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