Through your super, you may have exposure to private equity within the overseas shares asset class. You might not have heard of private equity before as it’s not typically available for personal investors but it’s likely you hold private equity investments if you are invested in one of our diversified options, like Core or Balanced. So let’s take a look at this asset class in more detail.
What is private equity?
Private equity (PE) refers to investments in companies that are made through private rather than public markets. Superannuation funds like Rest can access shares in private companies, as well as buying shares in listed companies on a stock exchange.
Because PE investments are not listed on a public exchange, they are not subject to the same level of volatility sometimes seen, for example, with the price of listed shares traded on a stock exchange. Private equity investments can therefore add some stability to a diversified investment portfolio.
Typical investments could include:
Venture capital investments – start-ups looking for early investment;
Growth capital investments – established companies looking to grow;
Buyout investments – acquisition of mature companies to restructure and re-purpose.
Buyout example: Virgin Australia
An example of a buyout is Virgin Australia. Virgin was listed on the Australian stock exchange until it was bought by Bain Capital. Virgin was struggling financially during the Covid pandemic, and the buyout gave Bain an opportunity to restructure the business and improve its performance before it ultimately sells it again. This may include “re-listing” the company back on the Australian Stock Exchange.
Why do super funds invest in private equity?
Investors can typically access PE investments directly, through a fund or as a co-investment alongside a fund. As an alternative to traditional asset classes like shares and bonds, PE investments can offer several advantages:
1. Diversification
As noted above, PE investments are not traded on public exchanges and so they do not typically have the same level of volatility as listed investments like shares, because they are not bought and sold every day. This means the PE asset class can offer some diversification to listed shares and with a smoother return profile.
Similarly to a portfolio of listed shares, a portfolio of PE investments is likely to be further diversified by investing in all kinds of companies across a range of sectors, industries and regions. At Rest, we certainly have some interesting investments in the PE portfolio – including a company that is working on how to 3D print replacement human organs in outer space!
2. Potential inflation protection
Returns in this asset class are often attractive and have the potential to outperform inflation over the long term – which is exactly what you want your super to do!
PE has the potential for higher returns than traditional share investments due to the active management of companies and hands on approach, as well as the ability to influence a company’s strategic direction. Furthermore, a good PE manager should be able to identify significant growth opportunities not available in public markets.
3. Long term investment horizon
PE investments are typically held with a longer term view in mind, which makes them a good choice for superannuation. Often these companies need to be held for a long time to realise their strategic goals and deliver investment returns. As the money invested is essentially locked away, the investor (in this case, Rest) typically expects to earn a premium or excess return over and above the usual stock market return to compensate. This benefit naturally aligns well with our own long term horizon.
4. Accessible to large investors
Finally, many PE investments are often only accessible to large investors, like Rest, who have significant amounts of money to invest. Direct investments, like PE, are typically not something you can do yourself because of the amount of money required and the level of expertise needed.
Rest is large enough, yet still nimble, and has the right level of expertise (including through its specialist private equity team) to be able to access and appropriately assess the pros, cons, risks and pricing of these unique opportunities.
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