AustralianSuper Doubles Down

Australia’s biggest pension fund is preparing a major expansion of its private equity exposure, betting that the sector will deliver stronger returns than listed markets despite a global slowdown in buyouts.

AustralianSuper, which manages A$392bn ($254bn) on behalf of more than three million members, plans to increase the number of private equity managers it works with by half over the next five years. That will mean adding at least ten new relationships on top of its existing 21.

The move comes at a delicate time for the industry. Private equity assets under management fell last year for the first time in decades, as higher interest rates, tighter credit, and weaker public markets slowed deal activity and exit opportunities. Many institutional investors have responded by trimming commitments or delaying new allocations.

Yet Mark Hargraves, AustralianSuper’s head of international equities, says the fund is leaning the other way. “We’ve deliberately kept our number of relationships smaller because we want strong partnerships with managers,” as referenced in the FT. “As we scale, we’re looking to grow it.”

Raising allocations in a cooling market

Earlier this year, AustralianSuper lifted its private equity target allocation from 5 per cent to 8 per cent of assets under management. On current numbers, that represents a move from under A$20bn to as much as A$40bn in the medium term. By the end of the decade, when the fund expects to top A$500bn in total assets, the commitment will be larger still.

Hargraves acknowledges that conditions for buyout firms are more challenging than at any point since the financial crisis. Deal-making has slowed, portfolio companies are taking longer to sell, and cash distributions back to investors have dropped.

But he argues that the long-term outlook remains favourable. “We think there’s still a number of opportunities that can be executed,” he said. “We also think you need to be selective, because there’s quite a lot of dry powder looking for new investments. But private equity continues to offer among the highest returns available, and we think that will remain the case for many years.”

Building out internal capabilities

AustralianSuper has been a private equity investor for more than two decades, though for most of that time it kept exposure small relative to equities and infrastructure. A major reason was cost: most traditional private equity funds charge the “2 and 20” model, 2 per cent annual management fees plus 20 per cent of profits, which can weigh heavily on net returns.

In recent years the fund has sought to mitigate that by striking direct co-investment deals alongside general partners, cutting out the layer of fees. Co-investments also give the fund more influence over portfolio composition and timing.

The internal private equity team has grown rapidly, from five people six years ago to nearly 40 today. Hargraves expects that to reach 45–50 within the next few years, underlining the ambition to be an active participant in the sector rather than a passive client.

Why private equity still appeals

AustralianSuper’s strategy reflects a broader tension in global pension management. On the one hand, private equity returns have outpaced listed markets over long periods, even after fees. On the other, the illiquidity, cyclicality, and opaque valuations of the sector create risk, particularly in downturns.

For Hargraves, the risk-reward trade-off is still attractive. “Private equity is a place where patient capital can capture outsized returns. As a super fund with long-term horizons, that’s exactly the profile we’re trying to build,” he said.

He points to several factors supporting the case:

• Resilient performance: Despite current headwinds, top-tier managers continue to outperform public equities over rolling ten-year periods.

• Diversification: Private equity offers access to sectors and geographies less available in listed markets, from high-growth software to emerging markets infrastructure.

• Control and governance: Active ownership gives funds the ability to drive operational change in portfolio companies, a lever absent in public equities.

Still, Hargraves concedes that selectivity is critical. The spread between top-quartile and bottom-quartile managers in private equity is far wider than in public markets. Choosing the right partners, and negotiating favourable terms, can make the difference between strong returns and disappointment.

Scaling up as contributions rise

The decision to deepen private equity ties is also driven by the structural growth of Australia’s superannuation system. In July, the mandatory contribution rate that employers must pay into staff pensions rose to 12 per cent of salaries. For funds like AustralianSuper, that translates into billions of dollars in fresh inflows each year, money that needs to be allocated across asset classes.

With bond yields still relatively low in real terms, and equities facing questions over valuation, private equity is seen as a key outlet. AustralianSuper expects its overall assets to exceed A$500bn by 2030, meaning even small percentage increases in allocation require billions in new commitments.

A shifting industry landscape

AustralianSuper’s expansion comes as the global private equity industry faces one of its most testing environments in years. Rising interest rates have made debt financing more expensive, slowing the pace of leveraged buyouts. Public markets, meanwhile, have been volatile, making it harder to exit through IPOs.

As a result, so-called “dry powder”, the capital raised by private equity firms but not yet deployed, has reached record levels, estimated at over $2.5 trillion worldwide. This has raised concerns about competition for deals and potential pressure on future returns.

Yet some investors view the current lull as a buying opportunity. Assets are cheaper than during the market peak of 2021, and funds with strong relationships and capital to deploy may be able to secure better terms.

Balancing scale with focus

Hargraves emphasises that AustralianSuper is not chasing sheer numbers of managers but rather aiming for depth as well as breadth. The addition of ten more relationships over five years would bring the total to just over 30, still small relative to global peers of comparable size.

“We want strong alignment with our managers. That’s easier to achieve if you’re not spread too thin,” he said. “But as our scale increases, it makes sense to broaden the base a little.”

Conclusion

AustralianSuper’s decision to expand its private equity roster highlights both the opportunities and the challenges facing long-term investors. While others step back in the face of a sector slowdown, the fund is pressing ahead, convinced that the asset class still offers superior returns over the horizon that matters most, decades, not quarters.

If its bet proves correct, the fund will be well placed to meet the rising demands of Australia’s growing retirement system. If not, it risks joining the list of institutions that entered private equity with high hopes only to face disappointment. For now, Hargraves and his team are clear: the upside is worth the risk, and the time to deepen exposure is when others are hesitating.