Q&A with Claire Smith, Alternatives Directors, Private Assets

Graeme Mather, Head of Distribution sat down with Claire Smith at our 2021 Market Outlook Event: Through the lens. Visit our events portal to watch the recording, download a copy of the speaker presentations, read content for your clients and more.

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What do small to mid-cap private companies look like? Are we referring to mum and dad owners of small business?

Claire Smith: The average EBITDA is probably about 50 million so we define small to mid-cap as 50 to 100 million of EBITDA and the large cap as 500 million plus. So as you can see through things like WeWor,k that we're not invested in, companies can get very large and still remain private in the current environment.

With high prices everywhere, and enormous demand for private assets globally, is the team confident there's a sufficient pipeline of opportunities?

Claire Smith: As I've outlined, that large buyout segment is where perhaps there is too much capital chasing a limited number of deals. It's quite interesting if you analyse the returns of private equity funds, the larger the fund gets, the more homogenous their returns become. We are really trying to operate in that smaller segment where we think there is still opportunity to buy companies at good fundamental prices, and also add value. That's what we're trying to do in the private equity space, is take the company, make some operational improvements, or help them expand geographically, or vertically, and add on the value so that we can exit at a better price. So we do think there's value, you have to avoid the crowded part of the market and really focus on that smaller specialised part where we think there's good fundamentals and the opportunity to buy at good prices.

The number of publicly listed companies is reducing in the US and UK due to increases in regulation. Does this mean there is more opportunity in private equity?

Claire Smith: Yes, I think companies are taking longer to list, the private equity market has matured and they've got the luxury to remain private for longer. There's a general preference and a better alignment of interest between private ownership and privately held companies because you could set a five to 10 year strategic plan and you're not worried about distractions, such as reporting season right now that can take a lot of focus from implementing a multi-year strategic plan. Companies like tech and healthcare, where they might not need a lot of capital to begin with, prove to be a big opportunity. For example, just in healthcare, I think there's only 1000 listed healthcare companies but there's 150,000 privately held healthcare companies. We think there's parts of the market where it’s better to access through private equity rather than listed markets.

Are there any sectors in private markets that are more prevalent than listed markets?

Claire Smith: Across private assets you can invest in real estate, infrastructure, private equity but we are just focused in this particular strategy on privately held companies. 50% of what we do is within tech and healthcare and the other 50% is across consumer industrials and services. Tech was the origins of the companies and still one of our longest running and best performing strategies but we find, particularly healthcare in the current environment, is adding a lot of popularity and we're seeing a lot of opportunities there.

Do you have to sell a private company as soon as it lists?

Claire Smith: We do have a couple of companies that have IPO’d in our portfolio. We're holding for six months as the general rule and as soon as that period is expired, that's when we'll look to sell. We don't want to be holding listed companies in the portfolio because that's fundamentally not what we do. There is generally a holding period after IPO and then we'll look to liquidate as soon as that expired.

The RNB entry and play - is that China's mandate for investors or encouraging it?

Claire Smith: We have an investment team on the ground in China, locals who speak the language. In order to get that access to Renminbi we have a qualified foreign limited partner regime so we have to meet certain capital adequacy ratios but China has made it easier to invest. Previously you had to request currency when you'd identified the deal which is obviously quite challenging in private equity because you're on a tight timeframe. Now what the Chinese government has done is let you raise money for a blind pool of capital, so we can apply for 200 million that we want to invest in deals and we don't have to know specifically what those deals are. It's becoming easier, but there's still a lot of restrictions around capital, people on the ground, directors, so there's a lot of headwinds. We've spent about nine months setting up this program and it's going reasonably well so every quota we've asked for in general from Renminbi we've been given. They are making steps to make it easier, but it still requires a fair bit of overhead I would say.

The fund had an outstanding return last year - is that repeatable or have the best investment values been realised?

Claire Smith: In 2020 we were very lucky. It was pretty early in the portfolio and more concentrated than I think it will be when it becomes more mature so that opens up opportunity but also risk. We were very fortunate that a company that was 5% of the holding increased in value by five times which has driven the performance so I would say, a 40% return is not what we should expect every year. But as the portfolio matures, it will add more diversification. It was an exceptional year, I'd love to say it's going to be repeated every year, but I think 10-12% per annum is a more reasonable long run estimate for this type of strategy.

Is this fund available as a listed product? Do you see any risks/disadvantages in ASX listed products within this asset class?  

Claire Smith: Traditional private equity funds are usually closed ended and your money is locked up for around 10, 12, or 14 years. What we've done is made it as liquid as possible while retaining the features of private equity - keeping the volatility out, keeping the valuations based on fundamentals. Our fund is not listed, it is an Australia's unitised trust so people can apply on a monthly basis, and they can apply to access capital on a quarterly basis. There are some caps on redemptions so if your personal circumstances change and you want your money back, it should be reasonably easy to access because the 5% is a global cap. This is a fund that's sold around the world, we have a feeder fund so there's already a couple of 100 million of AUM over the 12 months that its been operating. The thing to bear in mind as a risk is if there is a liquidity crunch and everyone wants their money back at the same time, that's when the cap can come into effect. It’s real private companies underlying the portfolio, the valuations do take about a month to produce because we are individually valuing every company within the portfolio because people are buying and selling at that price. The fund is available on wrap platforms, Hub24 and Netwealth, which really helps with the accessibility.

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