Some seemingly contradictory markers in Australia point up the global situation for private equity.
AustralianSuper, one of the country’s largest superannuation funds with about US$272.6 billion of assets under management, is reportedly planning to raise allocation to private equity from 5% to around 8% and to grow its manager relationships accordingly. This, in spite of its much-publicised write–off of some $272 million invested into US educational software firm Pluralsight.
For most funds, this would represent a sensible, prudent allocation to the asset class. AustralianSuper’s plans are rather more under scrutiny because of its involvement in the Vista Equity Partners-led privatisation of Pluralsight. The investment was written off two years ago after a $3.5 billion buyout, which collapsed when rising interest rates hit its buyout debt servicing arrangements.
Meanwhile, in a telling analysis of the changing dynamics of private equity returns, Australian financial commentator Roger Montgomery warned that the industry is facing a reckoning. In his assessment, private equity worldwide is facing a historic, and possibly lasting, shift of exit premiums into discount territory.
His analysis shows a collapse in exit valuation uplift from the 2010-2021 period when average exit premiums on the value carried in the investing funds were up to 29%.
Using Preqin and other data as of last December, the analysis shows that the likely figures for 2025 will be a discount to carry value of some 4%.
This would be the first slide into negative territory for exits in at least the past 15 years. And the signs suggest that the situation may not get better any time soon.
Montgomery’s figures show exit uplifts falling to around 10% in 2023 and 8% in 2024. He says this may represent a collapse in actual valuations since the exuberant years of highly valued deals in 2021-22, but that a retreat from risk across financial markets is also imposing discipline on investment assumptions.
Allocators to private equity such as AustralianSuper will need to consider their commitments accordingly.
In June last year, the Australian Securities and Investment Commission released findings from a consultancy process on the relationship between public and private markets. The regulator concluded that “private markets are here to stay and grow”, and that any regulatory guidance should be both measured and based on consultation with the industry.
Measured appears to be the best guidance for super funds and other entities when it comes to their exposure to private markets. They need to measure the actual likely outcome of those investments, and be wary of past buoyant assumptions.
