Co-investment opportunities come to the fore

The distress in the financial markets is offering Australian superannuation funds good opportunities to achieve a higher internal rate of return (IRR) on quality assets purchased directly.

Sam Magee, commercial director at Australian investment manager Industry Funds Management (IFM), told the Conference of Major Superannuation Funds (CMSF) held in Australia this week, that there are now more opportunities to buy quality assets at a better price.

“With more distressed sellers, more sellers and less buyers, you can get better IRR out of the market,” Magee said.

Magee said direct investment was about more than just paying the most cash to win the asset, and it was critical to know when to walk away from a deal.

“There is no shame in walking away from the wrong deal,” he said. “The alternative could be losing potentially millions if the asset doesn’t stack up to the valuation.”

Co-investment with other institutional investors can help to balance the portfolio and provide access to quality deals, Magee said.

However super funds must “vet potential co-investment partners, to ensure their interests are aligned with the other investors entering the consortium.

Potentially dangerous co-investors include conflicted investors, who are not necessarily driven by the return on equity, those who are politically sensitive, and “goughing” co-investors – who are heavily focused on fees.

Preferred co-investors are those that do not charge upfront or ongoing fees; do not have conflicts of interest; and that share an aligned view about getting the deal done.

Selecting the right advisers on the deal is just as important as choosing the right co-investors, and once the deal is done, the asset must be reviewed regularly, Magee said.

IFM has invested A$1.5 billion purchasing interests in 45 assets around the world.