Australian pension funds set out on a mission last week to expand their exposure to private markets assets in Europe. We caught up with some of those funds to understand where they see the opportunity in the region.
By Jack Arrowsmith, London
A powerhouse of institutional capital has just visited Europe.
Last week a delegation of Australian pension funds led by IFM Investors met with industry figures in the UK and France, to explore investment opportunities in European private markets.
The country’s superannuation system allows it to punch above its weight when it comes to pension capital. Despite only having a population of around 28 million, Australia’s system collectively holds AUD4.5tn ($3.2tn) in assets, making it the fourth largest holding of retirement savings globally.
Its strength comes from the fact that employees must pay a minimum 12% of their annual salary into a super fund. According to the Super Members Council, total savings in the country will surpass the UK and Canada in the early 2030s, to become the second largest after the US. This trip followed a similar delegation which the funds made to the US back in March.
Long-term European infrastructure assets have been a historical investment focus for the super funds.
Australian Retirement Trust (ART), one of the largest of the funds with over AUD350bn in net assets, currently owns 11% of Heathrow airport and in 2024 opened its first overseas office in London.
As of September, over 45% of its funds under management are invested outside of Australia.
“We’ve spent more time looking at energy and renewables over the last two years… than we did prior to that,” says Michael Weaver, General Manager – Mid Risk Assets and UK, at ART. He attributes this to decreased competition in the market following rising interest rates.
“We thought pricing prior was not as compelling as some other areas” he adds. ART now views the returns from energy and renewables as “better in terms of relative value against other sectors”.
Regulatory conditions may also be supporting the investment case. The recently agreed EU-Australia trade deal improves supply chain resilience for renewable energy assets by lowering EU tariffs on the critical raw materials which Australia exports, integrating the supply chains of the two regions.
Some of these materials play a key role in supporting the green energy transition assets that the super funds are looking to commit capital to for the long term. For lithium and manganese, two critical energy transition materials which Australia produces, the EU says it uses imports to meet 100% and 96% of its demand respectively.
“Europe’s clean energy pipeline, from offshore wind to grid modernisation and energy storage, represents long-duration, real asset opportunities that align with how we invest on behalf of our members,” says Kim Farrant, head of strategy at HESTA, another super fund.
HESTA invests on behalf of workers in health and community services. It currently has total portfolio exposure of over 11% in Europe, with TDR Capital among the GPs that it has backed. The firm also announced an allocation to European real estate investor Heitman last year.
“The EU-Australia Free Trade Agreement further strengthens the foundation for that investment relationship, as does the recently announced memorandum of understanding between the Australian and UK governments,” says Farrant.
The memorandum, signed by the finance ministers of both countries on the sidelines of this month’s IMF and World Bank meetings, committed to “an investment environment that helps superannuation and pension fund capital flow more easily in support of economic growth”, including through reduced barriers to cross-border investment.
For funds looking to make long-term commitments, a clear direction of travel like this is key.
But when it comes to defence, another key growth vector in Europe, some funds are waiting to see the full picture.
For ART, Weaver says that while the fund would consider aspects of the defence sector, “we haven’t had an opportunity come across our desk that’s been compelling enough for us”.
He attributes this to a small number of opportunities in this space overall: “Governments are still working through exactly how they would like to think about it”.
He adds that super funds may be able to play a role in supporting ancillary investments which work alongside European rearmament.
An example of what this could look like is the recent $1.9bn acquisition of British aerospace and defence engineer Senior plc by a Blackstone and Tinicum-led consortium.
Senior supplies components to defence contractors such as Boeing and Rolls Royce, serving the industry without direct exposure to offensive weapons.
Manager selection is key
The super funds are typically looking to partner with GPs when gaining exposure to Europe. Weaver explains that ART invests both in managers directly, and alongside them for larger scale commitments.
“There is scope for the London-based investment teams [of Australian super funds] to pursue direct deals more actively, however most continue to leverage their GP relationships” explains Kate O’Meara, partner at placement firm Asante Capital.
But despite the breadth of opportunities which the funds are chasing in Europe, the region still faces structural challenges, including weak growth and slow exits. Law firm White & Case reported this week that exits declined in Q1 to 244, from 278 in the prior quarter.
This can make a fund’s investment strategy an even more crucial determinant of success.
O’Meara says that for long-term pension capital, “LPs are being highly selective on a manager’s ‘right to exist and win’”, adding that pension funds are increasingly interested in emerging managers as part of their investment strategy.
This aligns with our own findings. In Private Equity Wire®’s Q1 Allocator survey, 42% of respondents selected differentiated strategy as part of their top selection criteria when adding new managers, trailed by founder track record at 30%.
In a market where exits are hard to come by, a novel approach is worth its weight in gold.
