UniSuper's offshore ambitions

UniSuper recently cinched a ground-breaking deal to buy into a $1 billion European mobile tower and is about to close another big deal for a forestry asset.

The superannuation fund's purchase of a  five per cent stake in Vantage Towers - its first direct infrastructure investment in Europe - landed through UniSuper's relationship with KKR, which had joined a consortium led by Global Infrastructure Partners to do the deal.

As for the yet-to-be-announced purchase, the Australian forestry asset will cost about half that price and complement the fund's infrastructure portfolio as well as a growing allocation to forestry assets.

All up, the two deals will boost the superfund's allocation to unlisted assets from 6 per cent for its balanced fund to around 16 per cent.

What's interesting is that UniSuper investment chief John Pearce has no plans at all to establish offshore offices.

Even more interesting is that the European deal was put together and finalised in Sydney.

Offshore offices are a hot-button topic right now.

Under pressure to deploy their fast-growing asset base, Australia's top super funds are aggressively building up their internal teams as they scour the world for private market deals.

AustralianSuper and Aware Super are building a significant presence in London and New York as they diversify their exposure from Australia.

For Pearce, it's tough to justify. "We don't believe there is a compelling proposition for hiring employees offshore," he adds.

"We've been very successful in attracting top-quality talent, but we think our proposition starts to get diluted if we move offshore.

"And that becomes a threshold issue because ultimately, asset management businesses are highly leveraged to the qualities of people they employ"

Pearce says it's hard enough to attract the best talent in Australia but much harder to poach top deal makers in major markets.

"As a profit-for-members fund, we're pretty competitive with base remuneration and annual bonuses. Where it becomes uncompetitive is with long-term incentive structures.

"We're not up there with KKR and the Macquarie Groups of the world. I can't pretend that I can get people of KKR quality in London and New York. I think that is unrealistic."

Smart partnerships

Pearce's strategy is to pursue offshore deals by forging strategic partnerships with a limited number of partners.

"We believe with our clout we can do a preferential deal in terms of the actual assets that we get to see, in terms of fees that we strike and the governance rights that we can negotiate."

So far, UniSuper has partnered up with IFM and Fitzwater in the UK and KKR.

And, there is another partnership in the pipeline.

"We're working on another as we speak. It has been in the pipeline, the terms were agreed to a couple of months ago, and the lawyers are hard at it, trying to form the optimal vehicle".

Pearce claims it would be a bit of a stretch to say that there is anything particularly special about the relationship with KKR. But he will say the partnership will likely develop. But he is something special about the mobile tower deal.

"With KKR, we could agree on a set price. We didn't get into any bidding war. We could negotiate favourable governance rights and fees that I don't think we could have negotiated 18 months ago when there was so much capital chasing too few deals."

Investors have long been sitting on dry powder - money raised that has not yet been deployed because of the scarcity of lucrative investments.

However, the UniSuper investment chief points to a shift in power to capital allocators from originators.

"We know that many of the big capital allocators are looking to put more liquidity in their portfolios because they are overweight unlisted assets. So, there is definitely less bidding pressure, and assets are coming come to market more frequently," he argues.

Holding up

As for equities, Pearce is surprised that they're holding up as well as they are.

He puts it down to the equity market taking a lot of comfort from Jerome Powell's latest comment that the US Federal Reserve has potentially paused the rate hikes.

Many reports have had the Fed chair highlighting the potential fallout from the failures of Silicon Valley Bank and other lenders and emphasised the high degree of uncertainty clouding the economic outlook.

That said, Pearce notes that it is not uncommon to see a pause before the next stage of rate hikes.

"We have seen a decline in inflation but it is still hovering at around 5 per cent so it's still too high. And, when you've got bond yields, heading towards 4 per cent, it's hard to see the next 10 per cent move in equities being up rather than down."

In terms of equities, it's impossible to get the timing right but his three-year view is that equities will be higher than they are today.

The investment chief said being maximum weight risk assets at the moment would take a lot of courage.

Pearce has not allocated fresh money to listed equities for quite some time.

All the inflow has basically been allocated to unlisted assets which has been boosted by the towers and forestry investments.

Central banks off the hook

As for inflation, the investment chief of Australia's fifth largest super fund is one of a clutch of asset owners globally who has been vocal about inflation being created by governments rather than central banks.

"Everyone reckons central governments have been the primary traders of inflation," he explains.

After the global financial crisis, everyone went to zero rates with quantitative easing.

"Yet consumer price inflation didn't stir at all. There was asset price inflation, but not consumer price inflation," he notes.

Pearce says central banks pushed rates down to zero again as supply chain shocks hit after Covid, but their actions were no different than before.

"The difference is governments started putting money in everyone's pockets - and that's when consumer prices skyrocketed," he says.

"Most of the excessive stimulus came in the form of fiscal policy, not monetary policy, and there is clear evidence that fiscal policy is far more potent than monetary policy. Now we're paying a high price for the excessive stimulus"

Pearce warns that the trouble is that too much attention is on monetary policy and not enough on fiscal policy".

"Jacking up rates is seen as the solution to inflation. But what if zero rates weren't the main cause of the problem to start with?"

New Zealand is a classic example of policy confusion. There you have a central bank hiking rates with great zeal while the Government just announced an expansionary budget. Go Figure"