Markets: KKR's long Aussie super seduction

Australia’s trillion-dollar superannuation industry lags behind other countries when it comes to investing in private equity, but Kohlberg Kravis Roberts hopes to, finally, change all that.

Several years ago the founder and co-chief executive of KKR, George Roberts, stepped off his private jet in Melbourne and was driven to the offices of one of Australia’s biggest superannuation funds.

Roberts was probably expecting the superannuation fund’s chief executive to greet him or, at the very least, to have the chief investment officer to sit down with him to discuss private equity and the opportunity that the fund may have to become a limited partner in one KKR's funds, made famous by Bryan Burrough and John Helyar’s book, Barbarians at the Gate.

Instead, Roberts was ushered into a small room where, after a typically laconic Australian greeting, a junior analyst sat the billionaire down and preceded to ask Roberts his name, title, the correct spelling of the firm’s name and how long he had worked there. Since 1976, if anyone wants to know. 

Roberts was reportedly livid about such treatment. He and his first cousin Henry Kravis, KKR’s other chief executive, are used to the red carpet treatment in Europe and the US from pension funds and endowments awed by the privilege of meeting Wall Street royalty.

“In Australia, there is the tall poppy syndrome,” the founder of an Australian private equity firm told Markets Spectator.

“Australian institutions have the perception that alternative, illiquid investments have not delivered the returns that will help boost their funds’ overall performance.”

Australian superannuation funds, which control about $1.6 trillion in investments – the fourth-largest such pension pool in the world – have traditionally had a lower exposure to private equity compared with US government pension funds and defined benefits systems.

The average private equity allocation of all US pension funds is 8.3 per cent. In Europe it is 6 per cent and in the UK it is 9.5 per cent. In Australia it is only 4.7 per cent according to the Australian Private Equity and Venture Capital Association. The association says Australian private equity funds have outperformed the local stock market indices over one-year, three-year, five-year and 10-year periods.

“The bigger superannuation funds try to establish direct relationships with outperforming funds, but it’s hard to get in as old investors reinvest,” says Warren Chant, the director of Chant West, which monitors superannuation fund performance.

Justin Reizes, head of KKR Australia, expresses frustration with dealing with the superannuation funds. Australia is “tough from a fund-raising perspective”, he told a group of reporters this week at KKR’s Sydney office, overlooking the Opera House and the Harbour Bridge.

“There’s a massive focus on fees,” Reizes says, while he recalls with some bemusement that superannuation funds want to know “what it is that sits in the fund”.

The private equity industry has criticised the Australian Prudential Regulation Authority for rules which dissuade superannuation funds from investing in private equity. Following the global financial crisis, many investors found it almost impossible to get their savings out of their superannuation fund, so APRA forced funds to ensure they could meet redemptions as best they could if there were market shocks.

But private equity investments are typically illiquid, as no public markets exist for such private investments. That doesn’t make them attractive to superannuation funds who know they could be at the mercy of a sudden demand from members wanting their money back. Private equity professionals in Australia are also worried their countrymen want more flexibility in switching between different superannuation funds, meaning the amount of money fund managers can devote to private equity will become even less.  

Superannuation funds are also hampered from investing in private equity by requirements that they offer investors funds with no – or very low – fees. Reizes would not disclose the firm’s fees, except to say it does not charge a 2 per cent annual management fee based on the size of the fund, nor does it take 20 per cent of the profits of the fund. KKR doesn’t disclose on its website the return history of each of its funds.

The firm has invested $US5.5 billion ($6.06 billion) in 30 Asia-Pacific companies including mining services company BIS Industries, healthcare provider GenesisCare and Kerry Stokes’ Seven West Media. This year KKR raised its second Asian fund of $US6 billion, some of it from Australian investors.

As at the three months ending June 30, KKR managed $US83.5 billion through a plethora of funds, garnered fees of $US179.8 million and had a net income of $US277.3 million. KKR has private equity funds for various regions of the world; a direct lending fund; a credit fund; a hedge fund; a natural resources fund; a mezzanine fund; a real estate fund; an infrastructure fund; and a fund that invests in distressed assets.

Reizes wants superannuation funds to invest in some of KKR’s non-private equity funds, as well as in the private equity arm of the firm’s business. But his criticism of the conservative investment strategy of Australian superannuation funds is odd given that some of the country’s biggest funds invest in private equity and other alternative investments – just not in KKR's funds.

The $85.2 billion Future Fund, sometimes referred to as Australia’s sovereign fund, gives its money to invest in buyouts to KKR rivals including Apax Partners, Archer Capital, Hellman & Friedman and Oaktree Capital Management, which also manages the Future Fund’s investments in so-called ‘special situations’, or distressed debt. Australia’s biggest not-for-profit superannuation fund, AustralianSuper, which has $65 billion in investments, prefers international private equity funds such as Harbourvest, New Mountain Partners and Warburg Pincus to KKR.

But KKR is not giving up. Roberts is now a regular visitor to Australian shores, despite the memory of an earlier experience. Reizes meanwhile is trying to build a network of business, political and social contacts that will hold the firm in good stead from a fund-raising and deal-making perspective.

“Eventually people will realise private equity has a place in a portfolio,” he says.