Big-city capital, small-town ways

Foreign GPs raising capital in Australia tend to assume one of two things about the country. One, that the common language and cultural resonance with the West mean there's nothing unique about the market. And two, that the market consists of freshman LPs anxiously awaiting the chance to invest with top-tier funds. Neither is the case; rather, the country should be viewed as an independent market of substantial size, real expertise and a particularly Australian way of vetting managers.

Australian pension funds, called superannuation funds, are the primary LPs in the country, poised to grow exponentially in the coming years. Traditionally, these funds relied on outside consultants to manage their alternative assets, and these gatekeepers dictated manager selection. However, all that recent growth has allowed the funds to bulk up their own investment staff so authority is in flux. Foreign GPs should tap local experts to determine who the real decision-makers are. These LPs also take their time, especially when reviewing new funds, so even the hottest managers will have to wait for that first-time commitment. Lastly, even with the capacity to invest billions, Australian LPs are a small, tightly knit community that exchange notes on managers and heed a handful of opinion makers. GPs would do well to make their first impressions count.

Few, but fertile fields
There are an estimated 40 superannuation funds with alternative asset programs, with an aggregate value of total assets, alternative and otherwise hovering in the range of $500 billion. ?We expect that by 2015 there will be five or six $100 billion pension plans,? says Les Fallick of Principle Advisory Services, a Sydney-based placement agency.

?These funds are? moving from strictly fund of funds plays to direct fund commitments,? says Michael Hoffman, president of the global placement agency Probitas Partners. ?Just a few years ago, there were maybe six or seven direct fund investors and now we see 25 existing, or soon-to-come-on-line programs.?

The first thing foreign LPs should be aware of is that every superannuation fund has a consultant running their private equity program. ?For fiduciary reasons every pension fund is using some sort of sophisticated gatekeeper and they'll have to sign off on any offering, so even if you contact the pension fund first, they'll refer you to the consultant,? says Fallick. ?Most gatekeepers are at arm's length from the trustees and the gatekeeper market is very concentrated ? maybe 16 in total, but the top five control 80 percent of the market.?

Given that gatekeepers play such a substantial role in constructing the portfolio, there tends to be a bottleneck of GPs awaiting their decisions. Fallick suggests planning for an 18 to 24 month capital raising period, as partners shouldn't expect to land once and fly away with a commitment. ?Even the folks with huge track records, who arrive and say they've closed the fund to US and Western Europe, but are willing to take additional commitments here, if an LP acts now, are going to walk away empty-handed,? he says. ?LPs are likely to respond to any pressure with a pass.?

Placement agents emphasize that investors here are methodical in their approach and want the time to meet and vet GPs on a personal basis. ?General partners better be ready to fly out Australia a few times to initiate and develop relationships, and appreciate the fact that many of these funds are making their first direct commitments outside Australia, so they'll be rightly cautious in moving away from the fund of funds model,? says Hoffmann. However, he does note that in a few cases, LPs have reached decisions as swiftly as their peers in the US and Europe.

Though many LPs may be making their first direct investment, GPs shouldn't mistake that for a lack of savvy. Fallick stresses the sophistication of the market: ?These guys have ten years of private equity experience, though largely in infrastructure, but nonetheless they understand the asset class.?

First impressions
Fallick notes that 80 percent to 90 ninety percent of LPs are in either Sydney or Melbourne, so it's a relatively concentrated community. He notes that in such cluster, word travels fast as investors don't view each other as rivals but often compare notes. ?By your third meeting, most of the market will have heard how well your first two meetings went, so first impressions matter,? warns Fallick. He also stresses that the community has a small cadre of opinion leaders, with six or seven people dictating two-thirds of market opinion.

Most GPs and placement agents agree that local expertise is crucial, especially when the decision-making hierarchies are in flux. ?You need an agent that knows where the influence is at any organization, and has credibility here, not just access, since most funds will meet with anyone,? notes Fallick.

One agent explained that with 80 percent of the funds having appointed new investment staff in the past two years, agents better have more than a list of funds and their gatekeepers.

?I think a lot of quality GPs landed here expecting their track record to speak for itself and discounted the importance of relationships,? says Hoffmann. ?But what they found is an audience of savvy, globally minded investors who want more than a pitch book before they invest ? some funds have caught on, and are winning major commitments as a result.?