During this live webinar, Associate Global Partners’s Head of Direct, Andrew Keay spoke to Managing Director of Vantage Asset Management, Michael Tobin, and discussed the benefits and risks of investing in private equity, why private equities have historically outperformed listed shares over the long term, how private equity typically performs during economic downturns, and how individual wholesale investors can access this asset class.

If you have any questions about VPEG5, please don’t hesitate to contact us by calling 1300 001 750 or emailing invest@contango.com.au.

Transcript

Andrew Keay (AK): Good evening. Welcome and thank you very much for joining us this evening. My name is Andrew Keay from Associate Global Partners, and I’m joined by Michael Tobin from Vantage Asset Management.

I’m pretty excited about the topic this evening, which is Private Equity. But before we begin, a little bit of housekeeping. Firstly, this is a live and interactions active session, so if you have any questions, in the control box, probably in the top right-hand corner, is the ability to put in some questions and we will endeavour to answer those questions towards the end of this evening’s presentation. This is a live presentation that will be recorded.

Secondly, the important thing is that this webinar is for educational purposes only, and it’s going to be general in nature; talking about private equity, and private equity funds, and how they’re structured. It doesn’t constitute personal advice and it must not be acted on or relied upon by persons who are not wholesale investors. The presentation is not an offer, it’s not a recommendation, and not a solicitation. The fund we’re discussing is only available to wholesale investors and does contain various risks, some may not be appropriate for you.

Again, we’re talking about private equity, and private equity has always been the domain of the big end of town. The institutions, the ultra-high-net-worth investors, and it was something that was really not accessible to mainstream investors. This is because of two factors. Firstly, the minimum investment was usually, at best, a million dollars, but usually five or $10 million dollars. Secondly, the lockup periods in these funds were around 10 to 12 years; both of those factors were a bit inappropriate for mainstream investors, mostly out of our reach. Private equity does bring with it the excitement of very large transactions in the 50 to hundreds of millions of dollars. We get to read about the sale event, we get to read about the turnarounds, or the trade sale, or the IPO listing in the newspaper, but for most of us, as mainstream investors, that was as close as we would get to it. Private equity provides access to a breadth of different opportunities and access to companies at much lower multiples than you’re going to find with listed shares. Particularly, in the current environment, where we’re seeing the multiples so high on these equities. For most of us, private equity has been unattainable. The ordinary investor gets left to mop up the bits and pieces. They will either get to participate in the IPO much further down the track or were left looking at the very start-up stage, angel investing, which are obviously much smaller businesses and riskier earlier stage investments.

This evening, I’ve got the pleasure of speaking with Michael Tobin. Michael is the founder of Vantage Asset Management and is an expert in private equity. They give qualified investors the opportunity to invest in private equity through their range of investment funds. These funds provide wholesale investors with the opportunity to invest alongside the big end of town, with the other institutional ultra-high net worth investors, and to access funds that have previously only been available to investors with tens of millions of dollars. Some of these funds may even be closed to new investors, so they’re virtually impossible to access. Vantage has made available, to wholesale investors, the ability to invest on the same basis as investors that would traditionally have had to place about a million dollars into the fund. The way it works is that the fund minimum is $100,000 and it works on a process called “progressive calls”, which means that you’d be asked to invest five percent initially, so on $100,000, that’s $5,000, and then as investments arise in the fund, you’d be asked to contribute to assist the fund to fund those investments. It may take you three to four years to fully invest in that fund over that time period, and the size of the call is going to depend on the size of the investment that the underlying manager is looking at.

So good evening, Michael, and before we kick off into looking at private equity and the benefits that private equity presents investors as an asset class, could you perhaps just share a little bit about Vantage, who they are, before we start talking about the benefits of private equity?

 

Michael Tobin (MT): Thank you very much, Andrew, and thank you everyone for joining the webinar today. Yeah, so Vantage was established in 2004. Really, it was an idea that was formed while I worked at St. George Bank in private equity. I was the head of private equity of St. George Bank, responsible for $140 million fund of funds portfolio. But across that period from 200o to 2004, we were managing institutional money. So, we had 50 million in St. George balance sheet money, and other industry funds were investing into our fund of funds, but then, invested into private equity. At that time, we saw that the returns from the private equity funds were quite strong. And so, we were looking at taking an opportunity to our private bank clients so that they could potentially invest as an institution themselves into the private equity asset class. There was nothing really available in the Australian market at that point in time. There was offshore, but nothing in Australia for individual investors to get access to the asset class. So over about a three-year timeframe, while at St. George Bank, we actually structured up a fund of funds which raised capital from our St. George private bank clients. And then, unfortunately, we had changed with CEO at the bank and change of strategy; private equity was deemed non-core. So myself and some other colleagues from the bank who had been running the portfolio decided to set up Vantage and actually take that IP that we developed while at St. George, with some cornerstone investors from the private bank, with a loan facility from St. George Bank for investors to borrow to invest in the fund, and we got up and running with our first fund in 2006. So since then, we’ve gone on… Effectively, the strategy is a fund of funds strategy by offering individual investors institutional access to the private equity asset class. And what I mean by that, Andrew, you mentioned before that the minimums for investment into the funds that we invest into can be a million dollars, more often they’re 10 million or $15 million. What we do with our funds is actually offer investors the ability to invest in the same funds as those institutions do via our fund of fund structure for as little as $100,000. So what we have today, as we’re talking about our funds profile across each of our Vantage private equity growth funds and, ultimately, our Vantage Private Equity Growth Five, which is now open for investment.

 

AK: Thank you very much, Michael. I started off by saying we’re talking about private equity. What is private equity? How would you describe private equity, Michael? It’s a broad term. And what segment of the private equity market is it that Vantage or the underlying funds participate in?

 

MT: So private equity is effectively equity capital provided to enterprises that are generally not quite on the stock exchange. So private companies are effectively what we’re investing in. The type of financing stages that exist in private equity obviously consist of venture capital, which everyone knows and have heard about, but that’s more investing into seed, start-up, early expansion-type deals. These companies may be pre-revenue, could be pre-earnings, but generally require the capital so that can actually prove their products and services, and get to a point where they’re profitable.

The next stage of private equity, which is where we invest, is really the growth capital, the buyout, and the turnaround private equity. So, let’s talk about growth capital to start with. These are companies that are profitable at investment. They had proven products and services, but perhaps are a little bit constrained with where they’re operating. They might be operating in one state in Australia, or they could be in New Zealand, looking to expand in Australia, and actually looking for the private equity capital to assist them to actually grow, either organically, by introducing their products and services to a new market, or via acquisition, but by acquiring a competitor and actually grow in scale in their business in that manner. So that’s growth private equity.

And then there’s buyout private equity. So this consists of both… Well, three types of buyouts. There are management buyouts, management buy-ins, and leveraged buyouts. I might just touch on one of those. A leveraged buyout will consist of generally buying into a company that’s being sold by a larger conglomerate for one reason or another, or it could be a company that is private but the existing founders want to move on, and perhaps the existing management team want to buy that company but can’t afford to buy that company on their own. So private equity steps up, assists those existing management to buy that company, and that’s called a management buyout.

The third method of private equity is turnaround. This is the situation where you might have an unloved division of a large corporate. When I say ‘unloved’, it’s been under resourced, it’s not operating a best practice to global benchmarks, in terms of what it’s able to deliver in earnings, and perhaps it hasn’t got the best management team running it. Turnaround private equity is about buying that company, generally at a very good discount on the assets, and then actually turning around that company by putting an exceptionally strong management team in, and actually improving a lot of the services and products, and the way the company operates, so that it actually then starts to deliver global best practice in its ability to generate earnings. So that’s turnaround.

They’re the three types of private equity we invest in, then you can break that down into the actual specific market size of the company where it’s operating. So, there’s small market, and these are generally companies that may be generating earnings or profits of less than five million dollars. Then you have the low or mid-market, which is companies that are generating somewhere between five million to $50 million of profit per year. Then you have the upper-mid market or the large market, which are generally the domain for large private equity funds, the global players. The names like KKR, Texas Pacific Group, Carlyle, Bain, etc. They play in that large market space, and these are companies that are generating 100 million-plus in earnings. Where we invest is the low or mid-market.

So, what we’re seeking to invest into, ultimately, with all of our portfolios is to buy companies that are earning somewhere between that five to $50 million, and their enterprise value add investment is somewhere between 25 million to $250 million an investment. And the reason we invest in this space is because it’s the sweet spot for delivering the strongest returns. Historically, this segment of private equity has delivered the strongest returns in Australia, and in many other geographic regions. So that’s where we invest.

 

AK: You mentioned strongest returns. What sort of returns… How has private equity performed historically and how would that compare say to list equity?

 

MT: Yeah, so Andrew, the industry body for private equity in Australia was known as AVCAL, they’ve recently changed the name to the Australia Investment Council, but they were established in 1997. From that point in time, they actually combined with one of the global research houses, Cambridge Consulting, and started actually collecting data on returns from private equity investments and funds in Australia, and that was in 1997. Since that period, from 1997 through to current, that data has been collected and AVCAL, or Australian Investment Council, produce a report each year, which is the nature and the performance of private equity in the Australian market.

One of the most recent reports produced by that industry body demonstrated that the median return for property equity funds operating across that whole timeframe, from 1997 through to current, is 11.1% per annum net of all fees. If you look at the Australian ASX Accumulating Andex across that period of time, and the ASX 200 Accumulation Index across that time, it’s generated 8.7% per annum. So that’s if you’re investing every private equity fund and they get access to every deal, you’re still outperforming the Australian listed markets. If you break down the performance a little bit further and look at what the upper quartile return is, meaning the top 25% performing private equity funds, what is the level at which above they deliver their performance? The most recent data is that they’re delivering around 20.3% per annum net return to investor after all fees. This is where we invest.

We invest into those funds that are delivering upper quartile returns. The funds that we invest into are delivering north of that 20.3% per annum return, sometimes 30, sometimes 40, sometimes 60% per annum net returns for investors, which is quite phenomenal when you compare that to listed markets if you compare it to the ASX Accumulation Index. So that’s why private equity actually forms a large component, or a reasonable component, for many endowments. Many large superannuation funds, industry funds, future funds, etc, all have exposure to private equity of somewhere between 15% to up to 50%, when you talk about some of the endowments offshore. And the reason that Vantage was established was to bring this asset class to individual investors. And I know back in 2004, when we established Vantage, I spoke to a lot of colleagues of mine, asking whether I had any access or any investments in private equity, virtually everyone had nothing invested in private equity.

I think if you did a poll across Australian investors, “What’s the percentage of private equity that they hold?” It would be less than five percent. So really, adding private equity to a balanced portfolio actually enhances the performance of that portfolio. And the reason for that is not only because of the stronger returns, but it actually has a low correlation to public equity, bonds and property. So when there’s high volatility in those other asset classes, very low volatility in private equity. And so, you actually smooth the returns in your portfolio, but actually increases the overall performance of that portfolio.

 

AK: That’s a significant performance average compared to listed equities. There’s got to be some risks there, Michael. Could you just discuss some of the risks that an investor would face in private equity and how you mitigate those risks?

 

MT: Obviously, the most risky way to invest in private equity would be to invest in one company that perhaps a colleague down the road or somebody that works for a firm has decided to buy, and you invest passively into that company, that’s high risk. Don’t do it.

The next level of risk would be to invest into a manager that perhaps is starting a new fund, maybe they were unproven, maybe they go and have a bit of a diversified portfolio, but you’re getting exposure maybe to about six or eight underlying companies. So, you’re reducing your risk by getting that spread across companies, but you still have a higher level of risk.

Obviously, to invest into a manager that has proven time and time again and that can deliver that top quartile performance, that north of 20% per annum net returns, is where you want to invest. But the problem is most of those managers are closed to new investors and, most of the time, closed to individual investors. So, what Vantage brings to the table is the ability for individuals to get access to those top-performing funds via our fund of funds structure. We really focus on reducing risk by actually getting a spread of our investments across a range of metrics. At the end of the day, every one of our Vantage private equity growth funds on average gets exposure to around 50 underlying companies. At investment, each of those companies represent, on average, around two percent of the total portfolio. If we do get a loss in our portfolio, out of those 50 companies, it really has very little impact on the overall performance of the fund. But when we’re getting two, three, five times return on the other investments, it really increases the performance. And I might just say Andrew, across the 140 investments that our funds have invested in today, the underlying company investments, we’ve only had three losses across that entire timeframe.

 

AK: That’s over the 15 years?

 

MT: Yes, then when we’re generating those three, four, five times return on the other investments, you could see how ultimately we deliver the return around investors.

 

AK: Very good, thank you for that. Timeframes are really important as well for investors to understand, and we’ve spoken about those progressive calls. What would be the average hold time that a manager would make an investment for and how does that play out across the different sectors that they’re in for?

 

MT: Look, the thing with private equity is they all have closed-end funds with a set term. What they’re looking to achieve is to buy a company, achieve a particular investment thesis, which may be grow the company’s earnings by three times over a certain timeframe, and when they achieve that particular thesis, then that will look to sell the company. So, it’s not a buy-and-hold strategy in private equity – It’s about buy, build and sell.

The average hold period that we’re seeing in the low or mid-market from our fund through onwards, which we’re focused on that low and mid-market segment, is three years. Some of the investments… Well, one of our investments in VPEG2 was held for 16 months, earnings grew by four times. Then it was sold and we provided a distribution to our investors on that side. One of the most recent exits, SILK Laser Clinics, it was held for 2.9 years and we generated four times return on that particular investment. On average, across our fund two and three today, we’ve had… Three years tends to be the average. Some of them a little bit longer, some a little bit shorter, but three years the average at this point in time.

 

AK: For investors looking at private equity, what should the timeframe be that they’re thinking of for investing?

 

MT: So, you mentioned before about the progressive call structure that we operate under, and that’s the same in the way that the underlying funds also call capital from our fund. So those funds, as I mentioned, are close-ended, they have a particular investment timeframe to make their investments, and a particular time to complete the divestment of all their funds. What we’ve seen with the underlying funds that we invest in to is that some of the term is around eight years. So, we envisage that the, what Emma was saying, with all that funds is in the low or mid-market, that term for an investor, if they want to stay to the end, until all the portfolio is totally divested, it generally will be somewhere around eight years. But I might just talk about the progressive call structure a little bit, if that’s okay, Andrew?

 

AK: Please do.

 

MT: As you mentioned, on application, the investors need only pay five percent of their committed capital. You got the example of an investor with a $100,000, so $5,000 would be the amount that they pay on application. Then, as the underlying funds that we have commitments to start to make their investments, they call capital from our fund, and in turn, we call capital progressively from our investors. So what we do generally is call capital on a quarterly basis, sometimes it’s between five percent or 10% of committed capital. And on average, we’re calling around 25% per year. We’ll be fully called, or fully drawn, on that total $100,000 investment in the space of less than four years.

But during that period, as I mentioned before, we start to get exits from the portfolio. So, we’re actually paying distributions back to investors. In the early years, it might be somewhere between two to eight percent. But in the later years, as we got to year three, four, five onwards, that could be up to 30-40% per year that we’re paying back in distributions. Some investors use those distributions they’re getting back to actually meet those future capital calls. Ultimately, we’re getting those exits occurring. Every period of three years, so maybe the last investments invested is undertaken in about year five of the fund, and it will be exited by year eight.

 

AK: So really, an investor would be thinking about an eight-year term?

 

MT: That’s if I want to stay until the end. We do have a redemption mechanism so people who’ve invested can redeem after a minimum four-year-old.

 

AK: We’ve spoken a lot about the mechanics of it. Is there one particular transaction you could illuminate a bit on how the managers looked at the target, what they did to generate the growth in that before it listed?

 

MT: Yeah, sure. I mentioned before, SILK Laser Clinics. This is a business that effectively does silk laser hair removal, skin repair, it’s called non-surgical aesthetics. They also do fillers, botox, etc. One of our managers, Advent Partners, invested in SILK in January 2018. At that point in time, SILK was generating revenue of around $13 million and had earnings of about $5 million. The business had 12 clinics at that point in time, operating in South Australia and Western Australia. The plan to grow that business was organically – open new clinics, but also to make strategic acquisitions in particular markets where SILK didn’t have the footprint.

Over the period from January 2018 through to December last year, or 2020, the business acquired one other competitor, which added 15 clinics to its portfolio. Then, it grew organically such that one of them when listed in December 2020, it had over 55 clinics. So, it grew from 12 clinics to 55 clinics. Across that period, SILK actually grew their earnings from five million EBITDA to 28 million EBITDA. It grew revenue from 60 million to over $160 million. Subsequently listed on the stock exchange at $3.45 a share, and our fund manager sold down 50% of the holding into that and have subsequently sold more shares. I think the share price when I looked recently was around four dollars, so we’ve actually got an uplift in that.

So, it wasn’t just the organic growth of the clinics and the acquisition of the other competitor, but it was also introducing a new brand, or a known brand, let’s say, a proprietary skincare brand called “Aesthetic ARx.” If you’ve ever been into one of these clinics, sometimes the skincare products are quite expensive, and by introducing our own brand, the margin that we’re actually making on selling that brand actually improved. So that’s what also contributed to the growth in earnings. Across the 2.9 year hold period, generated more than four X return and a very strong percent per annum to our investors, and they’ve received the distribution back from that already.

 

AK: You mentioned that the fund is made up of six to eight underlying private equity managers, Michael. How do you select those managers? What are the criteria that you use to actually make that fund selection?

 

MT: The number one criteria is obviously that they must’ve already previously delivered top quartile performance. We tend to focus on only investing in funds that have been in operation for around 10 years. By investing into fund managers who have strong previous performance, it will almost certainly continue to deliver that strong performance going forward. The first metric is really looking at first those managers that are experienced, that have generated that experience in the low or mid-market, that have generated those strong top-quartile returns in that low or mid-market, that the team had been together for a long time, that they’ve done at least 10 investments in their previous firms, that they’ve exited at least half of those investments.

What we actually do is we will monitor a fund manager probably for at least five years, and sometimes up to 10 years, before we actually make any commitment to them. I’ll give an example; one of the managers that we invested in our fund two, we first met in 2005, with their first fund. We then followed their progress, as they were doing deal by deal, and they did some work institutions, and that will continually deliver a top quartile performance from all of the investments that they participated in. When it came to them raising their fund two, which was in 2014, nine years after we first started monitoring their performance, we invested with them. They’ve now gone on to being in our fund three and our fund four. So provided a manager stays in our space, stays in that low or mid-market, doesn’t move out of that space and the team stay together, then we will continue to invest with them. But as soon as they move out of that space, if they want to move into the large market space and start to compete against the global offshore private equity funds, we will not invest again. Even if there’s a breakup between the partners or half the team go and decide to set up another fund, we will not participate in that. We’re very focused on making sure that, one, those managers that we invest in invest only in low or mid-market in Australia and have a transformational approach to generating earnings enhancement. We don’t invest in any fund manager that I guess makes their returns by financial engineering.

The beauty of this segment of private equities, there’s very low levels of debt actually utilized. In fact, probably half of our portfolio don’t even use leverage when they’re making their acquisitions, especially in growth private equity. It’s totally about the fund manager using their expertise that they’ve developed over at least a 10-year timeframe to assist the owners of that business to take it to the next level.

 

AK: How do the funds differentiate themselves from each other if they’re all targeting that low or mid-segment that you’re talking about? How are they different?

 

MT: I guess I mentioned before about the three different methods of private equity. There’s the growth private equity, which is really partnering with the founders of the business or partnering with an executive team. In those situations, the private equity may take 50% of the equity and the remaining 50% remains with the executive team. It’s really working alongside that executive team to take the business forward. There are managers in the market that just specialize in that. Each of our funds, our fund of funds, we tend to invest into between two to three of those types of fund managers, that only do the growth private equity.

The next method is the buyout. This is the management buyout, management buy-in, leveraged buyout, etc. This is where, as I mentioned before, buying a 90… Buying a 100% of a company, incentivizing the buy-in team or the executive team with a little bit of equity that they also pay for. But in those situations, the private equity fund will own more than 90% of the equity, so it’s a totally different strategy to growth private equity. It’s focused on buyout, but those utilize the same sort of methods to grow that company’s earnings over that two to three-year timeframe.

The third method is turnaround. There are specific managers in the market that only focus on turnaround private equity, and this is that unloved company or the “corporate orphan,” let’s call them, that are not getting the resources from the head office, difficult to actually expand, can’t make any acquisitions, can’t hire more people. Those situations where the turnaround private equity fund manager buys that company, puts the right management team into place, and starts directly operating turnaround projects. Sometimes, it could be 100 projects to actually improve the operations of that company so that revenue increases, earnings increase, margin improves, and ultimately they can get that company ready for a sale.

So, they’re three methods, and what we focus on is building a balance of the types of funds and their strategies in each about fund of funds. Generally, at least two to three growth private equity firms, around two buyout fund managers, and then a couple of turnarounds specialists, let’s call them. Ultimately, we’re investing in, on average, seven private equity firms, who in turn invest in six to eight underlying companies, and we’re getting that exposure to 50 underlying companies, all with different strategies, all different financing stages, all different size, all operating in different industry sectors. We have a high level of diversification which helps to reduce that risk that we spoke about before.

 

AK: Yeah, it’s impressive. It’s an exciting area. Now, Vantage itself, you’ve got Vantage Five there, could you just perhaps share with the audience a little bit about Vantage and the previous 15 years and some of the funds that you have done?

 

MT: Our Fund One, VPEG1, I guess we were a little bit more generalist at the time. We did focus on getting a spread across the private equity market, so we did invest in one fund that was suboptimal in size, so it was in the low market space, or the small market space. We did invest in one fund that was in the big market space. What we found is that with the underperformance in that particular fund, that fund operate across the GFC, it still delivered a double-digit net IRR to our investors and five out of the seven funds that we invested in delivered top quartile performance.

What we did from Fund One to Fund Two was really hone, or refine, our not only strategy, but also the structure of the funds. That Fund One was structured as a company, totally inefficient, we paid a lot of tax, didn’t end up in the hands of investors in a more tax-friendly manner. So, what we did with our Fund Two onwards is structured each of the funds so they full flow through vehicles. There’s no tax actually held or captured at the fund level. All the tax components flow through to the investor and are taxed in the investor’s hand at their own rate. If a self-fund with capital gains, they taxed at… Discounted capital gains is taxed at 10% as opposed to 15, etc. So that’s the beauty of the structure is what we had going forward.

The other factor that we changed was the strategy. We did a 100% focus only on that low or mid-market. This is where we only invest in the fund sizes, on average, from about $200 million fund size through to about $800 million fund size. Ultimately, we’re getting those companies 25 million enterprise value in the smaller funds, an investment that can grow up to be $100 million funds… Sorry, companies. Then, in those larger funds, they’re buying into companies that are right around the 200-250 mil enterprise value, and then they’re growing those companies to almost become billion-dollar companies. So that’s been our strategy going forward. I can talk about the performance of our VPEG2 and VPEG3 if you want, today.

 

AK: Just if you can share a little bit of the highlights, that would be helpful.

 

MT: Sure. Our VPEG2 fund was established in 2014 with $15 million worth of commitments. We had eight underlying private equity funds we made commitments to on one kind of investment. It resulted in 55 underlying company investments. We’ve had 14 exits to date that have represented a 3.3 times multiple of invested capital, and an average hold period of three years across those investments. We’ve got the audited numbers from Ernst & Young, and last three month return to 30 June was 9.2%, and the 12-month return to 30th of June this year was 56.2%. The annualized return since inception is 21.2% per annum, and that’s after all fees.

You can see that we’ve already achieved that target, which is 20% per annum return, and we expect that to continue to tick up as more of the portfolio matures and is solid at that average multiple that we’re saying coming through the portfolio. Just in terms of VPEG3, exactly the same structure as VPEG5, consists of a limited partnership, which full flow for vehicle, as well as managed investment trust, also full flow through from tax purposes. We started raising that in 2017, roughly 67.5 million of commitments, seven underlying private equity funds and two co-investments. At 30 June, we had 38 underlying company investments. We had three exits at that point in time that had delivered 3.6 times multiple of invested capital. Also, an average hold period of three years. SILK Laser Clinics was one of those, held for 2.9 years. The last three months… These are audited numbers again by EY. Last three months’ return, 7.4%; 12-month return, 56.9%; annualized returns since inception of 23% per annum net of all fees.

 

AK: They’re very high returns, so that would say… For private equity itself, we live in a very regulated marketplace in Australia. What regulation is there that would be specific to say private equity? What protection is there out there for that market sector that governs it and controls the activity in it?

 

MT: Right, it’s highly regulated. Of course, companies are regulated by ASIC. The private equity funds themselves are regulated also by the Venture Capital Act of 2002. Most of the structures… It’s called the “Venture Capital Act,” but it was called that because that actually only covers private equity at that point in time. It should be called the “Private Equity Act.”

There’s reporting that’s required to go to the regulator on a quarterly basis, annually, and then, of course, audited accounts need to be lodged with ASIC every year. It was exactly what we do with our fund. We have a limited partnership that is also regulated under that Venture Capital Act. A group called Aussie Industry, which is the Department of Innovation, Industry and Science, is responsible for the regulation of the Venture Capital Act and the reporting that goes through to them on a quarterly and annual basis. So, very detailed reports go to them, right down to the number of investments, the amount of capital that’s been deployed, the amount of capital called, the underlying funds, the list of those underlying funds, and then exits that have occurred, how much money has gone back to investors. Everything that we detail now in your report to investors detail needs to be provided to Aus Industry on a quarterly basis as part of the regulation.

 

AK: Fantastic, thank you. There was a lot of rigor and security in terms of how investors can get some comfort that there is regulation sitting behind private equity that really ensures that the managers have got a framework to operate in.

 

MT: Yeah, most definitely. Obviously, there are private equity opportunities out there that maybe aren’t as regulated as that. We only focus on investing in those highly regulated funds that meet all that criteria. All of our funds that we invest into must be audited on an annual basis, generally by one of the big four accounting firms. All of the funds that we invest into provide monthly and quarterly valuations, they revalue their portfolios on quarterly basis. Many of those re-evaluations are also audited quarterly, and at least annually. Then when get all that information and we provide that to Ersnt & Young, who’s been the auditor of all our funds since inception, obviously they go through all those audited accounts and come up with the audited accounts for our investors, that we provide in an annual report to investors at the end of each financial year.

 

AK: Thank you very much. I’d just remind the audience that we can take questions. If anyone would like to send some questions through, we’d be happy to address those in the next couple of minutes. So Michael, just quickly again, with regard to access and the best private equity managers in the market, how have you managed to do that and how do you continue to do that and find new managers that you can work with?

 

MT: I mentioned before, I was at St. George Bank, head of private equity from 2000 through 2004. Prior to that, I was actually a manager in corporate strategy at Arthur Andersen, and we were actually advising private equity funds on their underlying portfolio companies in the late 90s. Private equity really started to come of age in the early 2000s. Prior to that, there probably was only a handful of managers that operated in Australia, and some offshore managers that started to participate. Many of the managers that we were meeting from the late 90s through early 2000s had some young teams that were also investment managers at their firms. It’s interesting to note that many of those investment managers that started with those firms back around that time are now partners have their own firms, and so we’ve actually grown up with the market, so to speak.

We’ve got long-standing relationships with most of the private equity practitioners that we want to continue to have relationships with, and there are some that moved out of our space. Yes, we follow their performance, etc. If there’s a spin out occurs from one of those groups because part of the team wants to come back into the low or mid-market, then we’ll come back and invest with that group going forward, provided they’ve got that experience of investing in low or mid-market. Given the fact that we only invest in private equity, only invest in the low or mid-market, only invest in Australia, we really are one of the preferred… Well, not preferred, but we are always one of the first limited partners or institutional investors that our property equity managers come to when they’re looking to raise their new fund.

As I mentioned before, it’s very difficult to get a foothold of into a new fund, even if you’ve got 10 to $15 million, because those new funds tend to be closed to new investors. If they’re raising and coming back to market, they’ve generated the strong returns by always having a fund size of, let’s say, $500 million, then they’ll come back to market and raise a $500 million fund. If they’ve generated top quartile returns for the investors in the previous fund, then, more than likely, those investors will step up and continue to invest in that subsequent fund. Very rarely does another slot become available, but we’ve got longstanding relationships with many of the managers in market, and we’ve been able to add some new managers to each of our funds progressively. With VPEG5, we’ve been monitoring the performance of at least four, let’s call them, new fund managers, new to us, but not to the market, that will most likely… One of those or two of those could be an underlying fund that we make a commitment to from VPEG5.

 

AK: You’ve mentioned VPEG5. Could you just share a little bit more about VPEG5 itself? It’s the fifth in the series that you’ve launched. Maybe a little bit about the fund, what it’s investing in and what it is that they’re trying to achieve with VPEG5 that might differentiate it from three and four, for example?

 

MT: Well, I guess the differentiation for each of the funds is that because they’re all closed in and we only invest in closed-end funds, we’re always investing into the next generation of a fund by one of our existing fund managers. One of our managers, we have invested in all of their funds since their fund two, and they’re coming to market early next year. They continued to live a very strong top quartile performance, and they’ll be a manager that will be in our VPEG5.

Our focus remains always to invest low or mid-market, growth private equity, buyout and turnaround. We have a set of managers that we will continue to invest with. There’s around probably 10 to 12 of them, but each fund that we invest from will invest into won’t invest into all those funds because they won’t be in the market raising capital during our investment window. We’ll obviously invest into around six or seven of those.

You might get some replication from VPEG4. There might be a couple of managers in our VPEG4 that will be in our VPEG5. But more than likely, you’ll have similar managers then, coming from VPEG3 and VPEG2, that are back in market for their next fund that will coming to our VPEG5. So pretty much, business as usual. The same as what we did with VPEG2 and VPEG3 and four, which we’ve just started obviously investing as well, and it’s building its portfolio. But VPEG5 will have exactly the same strategy and structure as those previous funds. Target size is $250 million. Target return, 20% net to investors over a four-to-six-year timeframe, so it’s 20% per annum. And as we mentioned before, $100,000 minimum investment, and we have redemption after minimum four-year hold.

 

AK: Terrific. Michael, thank you very much, and I think that pretty much brings us to a conclusion. There was a question on the fees, which I think is probably going too much at the product level at this particular point. We were hoping just to ensure that people got a really good understanding of private equity and what you do at Vantage Asset Management. If there’s no other questions, Michael, is there anything you’d say to people just to summarize what we’ve spoken about this evening in terms of private equity and the opportunity, risk mitigation?

 

MT: I guess at the end of the day, it’s always good to add private equity to a balanced portfolio.  I think, like most Australians, before I started investing in private equity, most of my investment was in listed companies, so the ASX. It’s difficult to know the right time to buy in, when to sell, etc, and it becomes a bit of a headache sometimes. The beauty of private equity is that we’re investing with the best managers in the country, who have consistently delivered these strong returns. And so, I can sleep well at night by knowing that my money is well invested and highly diversified across a range of investments across their size, geographic location, the manager’s strategy, and the industry sector. Having that diversification really reduces the risk, and ultimately is delivering that a strong return.

If you look at your own portfolio, have a look of what exposure you’d have to private equity. There might be some other offshore private equity funds in your portfolio that might be a much more diversified, maybe have a lower return profile. What we’re providing here is institutional private equity to individual investors. The funds that we invest into, we’ve got the likes of the industry funds investing alongside us into those funds as well, and offshore endowment funds. Effectively, each individual, with a $100,000 minimum commitment thrown down over a four-year timeframe is effectively treated as an institution by us, and ultimately getting the same returns as those institutions, globally, that are investing in those funds too.

 

AK: Thank you very much, Michael well, that probably brings us to the close for this evening. As far as follow-up on this one, we are available to talk to anyone at all that would be interested in coming back to us. We will send out a follow-up email for feedback from the audience as well. In terms of how to invest and other specific questions, we’re welcome to take those calls from you.

Michael, thank you very much, indeed, for sharing those insights on private equity. I think it represents a really exciting opportunity for investors, and certainly from a diversification perspective. In the environment that we’ve been in and going through, it would appear to be for a qualified, sophisticated, or a qualified investor, an appropriate consideration. Thank you very much indeed.

 

MT: Thank you very much, Andrew and thank you, everyone, for joining the webinar today.