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QSuper's investment strategy is based on a set of 14 investment principles1 that are at the core of how we invest members’ funds.
One of those principles states that: “Illiquid assets enhance risk-adjusted returns and they can be effectively accessed when investment time horizons are sufficiently long.”
Putting that principle into action has driven QSuper’s investments on members behalf in three well-known types of illiquid investments – private equity,2 as well as infrastructure and real estate. At the end of December 2018, private equity investments represented around 6% of the value of QSuper’s Balanced option.3
The potential for higher returns than what’s possible for share market investments is a significant influencer for our private equity program.
Investors demand higher potential returns from investments associated with higher risk. That’s logical, and there are specific risks associated with private equity.
“Illiquidity”, the inability to quickly convert an investment into cash, is arguably the biggest risk associated with private equity.
Unlike shares of listed companies on stock exchanges, privately owned companies don’t trade on exchanges. Buying or selling privately owned companies is usually a lengthy process involving a relatively smaller number of parties.
Not being able to quickly sell if you want to, is a risk.
Because of this illiquidity, private equity investors demand higher potential returns.
That’s also QSuper’s view and that’s why when we invest in private equity, we do so with the aim of trying to achieve higher long-term returns than what can be delivered by share markets.4
Diversification is also a feature of private equity and that’s another reason for our investment in this asset class. By investing in private equity, we diversify away from the risks associated with share market investments.
Companies listed on share markets are in effect valued every millisecond. They’re also required to provide quarterly earnings reports.
Privately owned businesses are free from these pressures and instead management teams can execute multi-year business plans knowing that private equity investors are generally more patient and are looking for longer term results, not quick gains.
Launched 50 years ago, KinderCare5 is now the largest child-care provider in the US serving around 185,000 families in 39 states and Washington DC.
It’s also owned by a private equity fund – in which QSuper is an investor – that’s managed by Partners Group,6 a global private markets investment manager.
KinderCare’s before and after Partners Group stories are huge contrasts.
By 2012, KinderCare had suffered 14 consecutive quarters/42 months of decline, with underperforming and underutilised centres. Only 35 percent of centres were accredited by independent groups.
Change came in 2015 when KinderCare was bought by Partners Group, who brought to the table their deep experience in private equity, global exposure and a focus on long-term, responsible growth.
Since then, KinderCare has racked up more than 22 consecutive quarters/more than 66 months of growth.
Rather than looking for quick wins, Partners Group looked at KinderCare’s five to 10-year profitability and revenue growth trajectory.
QSuper’s investment in KinderCare has performed well, so far, having delivered a return of around 26 percent per annum.7
Independent assessments now consistently demonstrate that KinderCare children are, on average, four months ahead of their peers in kindergarten readiness.
The company is now America’s most accredited early learning provider – with nearly 100 percent of KinderCare centres accredited.
Private equity has helped to make all this possible. That’s a good investment as well as a good societal outcome.
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2 Private equity describes investment funds and investors that directly invest in privately owned companies that don’t trade on stock exchanges.
3 This refers to the accumulation account of QSuper’s Balanced option.
4 Specifically, QSuper’s private equity return target is the MSCI World (Ex-Australia) Total Return Index (this index is a measure of the performance of the global share market excluding Australian shares) + 3% percent per annum, with currency exposure hedged back into AUD and net of fees and taxes.
7 This is an internal rate of return measurement from acquisition of KinderCare in 2015 by a Partners Group private equity fund, to the end of December 2018. The internal rate of return is commonly used to measure the investment performance of private equity investments. The term internal refers to the fact that the internal rate excludes external factors, such as inflation, the cost of capital, or various financial risks. It is also called the discounted cash flow rate of return.
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