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Cap Intro Teams Connect Offshore Managers with Australian Funds Market

Posted: 18 Jan 2012

Prime brokers say that the gatekeeping role that investment consultants play for institutional investors, plus mergers and consolidation in the number of superannuation funds, means that it can be challenging for alternative asset managers to gain introduction to asset owners. But they say that capital introduction services can be useful for offshore managers looking to access the AU$1.4 trillion managed funds market.

“Australia is a more difficult market to gain access to the asset owners due to the significant reliance on the consultants,” says Graham Seaton, head of equity finance at Bank of America Merrill Lynch. “We've seen consolidation in the superannuation fund market with funds becoming significantly larger. Often investment teams have not yet grown in line with assets under management, resulting in increased reliance on asset consultants. Also, in many instances an investment will still require formal authorisation from an asset consultant even though the asset owner is responsible for the research and manager selection, adding a further step to the process.”

But capital introduction services can be useful in Australia, given the fact that prime brokers have established relationships with asset owners that fund managers would not have. Prime brokers are careful to insist that introduction services are just that – and not an endorsement.

“Depending on the fund, some might have dedicated marketing people, some may use third-party marketing firms, or some may use both and also rely on their prime broker to help them with the introductions,” says John Gregory, a director of Citi’s prime finance sales and capital introduction. “From our perspective, really, it is just an introduction – it can’t be seen as any sort of recommendation, and that would be for compliance and regulatory reasons, which is different across each jurisdiction. We’re quite prudent in how we go about these introductions.”

Australia is an undeniably attractive potential market, given its size and the relatively small allocations to alternative managers. Gregory of Citi says it is important for offshore managers to understand how the different categories of asset owners would view alternative assets.

“A lot of offshore managers see this very large pool of assets that are being managed by super funds and institutions and want to tap that and want to understand how to do that,” Gregory says. “Family offices have a different process than the institutions, particularly the super funds, where you do have that gatekeeper role that consultants play. You have to work both sides of the equation there to get in with the consultants, because if you’re not approved with them, you have a low probability of converting that investment. The role that the consultants play is exactly that – the gatekeeper.”

In recent years, in line with other asset classes, Australian asset owners have been stepping up their due diligence, and some have expressed preference for an independent risk function that reports directly to a manager’s board.

“Due diligence has become more involved and in depth as hedge funds and their counterparties become more complex,” Seaton says. “Particular areas of focus currently are counterparty risk, tax structures and technology. When reviewing counterparty risk, investors will often review all counterparties to which the manager is exposed to ensure there are either multiple providers or appropriate back-ups in place. Lessons learned by investors from 2008-09 were that while a manager's investment thesis didn't necessarily break down, structural aspects – investment-investor liquidity mismatches, concentration of prime-broker risk, lack of independent NAV checks – needed to be closely focussed on.”

Institutional investors, particularly superannuation funds, often have query track record, and want details of how fund managers navigated the global financial crisis, plus have limits on concentration of investment, Gregory notes.

“In terms of assets under management, they’re looking at funds that have anything over AU$1 billion, and they may have their own issues of concentration,” Gregory says. “They can only be a certain percentage of the assets under management, and they may have a minimum ticket size that they want to invest. What I’m hoping we see happen is that the second- and third-tier firms based on assets under management start to get more interest. They have the track record, but the lower assets under management – they’re the ones that still generate the alpha.”

Of late, Australian institutional investors have shown increased interest in CTA/macro funds, while long-short equity strategies continue to be popular, Seaton says.

(RA)

If you have any comments about this story or news tips, contact Christopher Gohlke in New York at cgohlke@globalcustodian.com or Janet Du Chenne in London at jduchenne@globalcustodian.com.