In August, it was reported that Australia’s largest super fund had written off a $1.1 billion investment in Pluralsight, after the latter entered a restructure following a steep decline amid rising interest rates and growing market competition.
Speaking to InvestorDaily, AltX co-CEO Nick Raphaely said this situation reflects the risk of investing in a private business with some level of gearing.
“If revenues of the underlying company fall and borrowing costs rise, as was the case here, this will naturally cause some stress in the business as seems to have been the case here,” he said.
Raphaely emphasised that private equity remains a well-established asset class, typically requiring large ticket sizes to participate in deals. As a result, investors usually gain access via private equity funds or super funds, which are diversified across a number of deals.
“Therefore, the likelihood of retail investors directly losing a lot of money because a single deal goes bad, I think, is pretty small,” he said.
“Where there are returns, there is risk, and this is probably evidence of that.”
He also added AustralianSuper appears “well diversified” and as such, shouldn’t face hurdles in absorbing this loss.
This point was earlier confirmed to InvestorDaily by AustralianSuper’s head of international equities and private equity, Mark Hargraves, who said “there will be no impact on members’ future earnings”.
Hargraves also reiterated that the “higher risk/return profile for private equity is a characteristic of the asset class”, adding that “we will continue to invest in private equity, venture capital and also the tech sector in general”.
Similarly, Alan Greenstein, CEO at Zagga, underscored that private equity, by its nature, is a risky asset class.
Commenting particularly on AustralianSuper’s great loss, Greenstein told InvestorDaily: “It was a very well-supported deal when it happened”.
“I don’t think that it’s necessarily fair to judge AustralianSuper for taking the write-off. I mean, obviously nobody likes to lose money on a deal, but they certainly weren’t the only players in the deal. It was a very well-supported deal when it happened,” he said.
Addressing misgivings around the asset class, Greenstein maintained that private equity players understand the risk is high, noting that “when you get it right yet, it is spectacularly right”.
“So when you get it wrong, there is the propensity to get it spectacularly wrong.”
Greenstein also offered an explanation as to why the AustralianSuper situation is attracting close scrutiny, noting that it’s due to the presence of “mum and pop money”.
“Whether those mom and pops are actually invested in that specific fund, which took the write-off, or whether they’re just investors in any of the other AustralianSuper funds, it raises the question as to whether a manager who’s playing with mom-and-pop money should be investing in these kinds of deals and what the downside is for that. I think that is a valid question,” he said.
For Pete Robinson, head of investment strategy, fixed income, at Challenger Investment Management, all funds are in the business of taking risks, and when you take risks, some losses are inevitable.
“In reality, all we know is that AustralianSuper invested in the equity of Pluralsight and lost money on the trade. Sure, the figure is large but as is their total funds under management, though we don’t know how much exposure they have in different options,” he told InvestorDaily.
He emphasised that “we cannot make the call that private assets are inherently risky” based on a single trade. For him, the key takeaway is the importance of governance and transparency.
“Investors conflate losing money with an inherent flaw in the product. However, we must look at each deal on its own merit. In the case of the Pluralsight/AustralianSuper deal, there is nothing publicly stated that should impact trust in private markets,” Robinson said.
Addressing opacity
In its latest corporate plan for 2024–28, the Australian Securities and Investments Commission (ASIC) recently announced reviewing the growth of private markets would form a key part of its upcoming activities.
Referring to private markets as opaque, ASIC chair Joe Longo said: “While Australia’s private markets are dwarfed in size by our listed equity markets, their opacity presents an outsized risk to market integrity, particularly as more investors become exposed.”
Commenting on the corporate regulator’s announcement, Robinson applauded ASIC’s “worthy endeavour” to do more around valuations, treatment, and disclosure of upfront fees, and management of conflicts of interest.
Similarly, speaking on an InvestorDaily webcast last month, Andrew McVeigh, managing partner at Remara, endorsed increased transparency and standardised reporting as “fantastic” for the industry, noting it would help differentiate between effective and ineffective managers.
“I think the ability to be able to weed out good managers versus bad managers, a level of transparency and standardised reporting, would be fantastic for the industry and probably be very beneficial for most investors. So, our house view is we’re well supportive of ASIC and their endeavour to show some transparency in the industry,” he said at the time.
Joining him on the webcast, Raphaely said he supports sensible regulation as a means to elevate industry standards and differentiate businesses, but noted that excessive regulation, prevalent in Australia, can be burdensome.
To hear more from our webcast, click here.
