AusSuper sees positive IPO conditions, not activist for activism sake – Shaun Manuell
Summary
- Poor products, reluctant buyers hinder IPO activity
- AusSuper not activist, will engage if companies underperform
- Direct engagement with AusSuper encouraged for potential bidders
Speaking at Mergermarket’s M&A Forum in Sydney this week, Shaun Manuell, Head of Australian Equities at AustralianSuper, Australia’s largest fund manager, suggested IPO conditions in Australia are pretty good with keen sellers, buoyant markets and attractive interest rates.
He explained why IPO activity is nevertheless subdued, pointing to poor products and reluctant buyers where the market has matured and is more discerning about better quality products. The shift in IPO sentiment is more structural, rather than a primarily cyclical adjustment.
Manuell argued sellers can no longer expect outsize returns, especially as the market is now expensive, describing the concept of an opportunity window as “madness” as this suggests sellers just want to exit – ignoring the fact that buyers want to know what’s in it for them to warrant the work required to investigate investments and assume the risk.
His checklist for a revival in the IPO market is two-fold: Selling the business at a fair price that leaves suitable upside for the new owners; and providing almost a warranty of quality to buyers. This involves dropping the term “IPO window”, having the board appointed well before the IPO launch, aligning management incentives for a period beyond the prospectus forecast and vendor escrow periods, and ensuring the sellers’ escrow period extends beyond the prospectus forecast period. “The IPO market will open up tomorrow if this is done.”
On AusSuper’s attitude towards activism, Manuell said AusSuper does not invest in a business to be an activist. “We invest in businesses we believe will deliver long-term performance. If they deliver we are generally supportive.”
AusSuper is a substantial stakeholder in 58 stocks and continuously questions what activity is needed to unlock value, Manuell added. “We will become more active in our stewardship if we feel companies are not performing optimally.” AusSuper’s activity can range from more constant engagement to potentially looking to appoint its own directors if the situation warrants.
To potential bidders for companies AusSuper invests in, he advises dealing directly with AusSuper rather than going through intermediaries. “We are happy to share our views and if the bidder wants us to join their consortium, the earlier the engagement, the more constructive it will be.”
AusSuper, Manuell added, does not build positions to be activists. “This is not our purpose or what we are particularly good at.” If AusSuper increases on a share register it is because it likes the story. “We change to become more activist if the facts change and companies are not delivering what they said they would. We start to question. Our support is conditional on management delivering against their stated strategy,” he said.
He suggested companies experiencing problems should talk directly to AusSuper which, because of its 3+ years focus, prefers meeting outside reporting season when a long-term time horizon is easier for companies to talk about.
Performance horizon
On capital allocation Manuell noted that AusSuper’s investment team is not mandated to market and to bring in the money; the team is incentivized to deliver investment performance. “We have no pressure to raise capital. The main pressure is performance.” Such performance becomes harder to deliver as AusSuper approaches 3% of the ASX200 index capitalization. He emphasized that AusSuper’s long-term performance has come from being able to focus on the longer term. “Our sweet spot is thinking about what value a company can create over 3–5 years, not having to focus on the next 12 months”.
He highlighted three phases in AusSuper’s investment approach: First comes internalization, which started 11 years ago as part of a multi-manager platform; second was in the form of a shift from a multimanager platform to a fully internalized model; third is working through how best to sustainably and actively manage money 3-4 times larger than the next group of large Australian active fund managers.
Manuell said it was a commonly held belief that it would be impossible for AusSuper to outperform the market once it exceeded AUD 20bn in assets under management. AusSuper is now managing 90bn, or 3% of the ASX index. Going forward he anticipates around 70% of AusSuper’s inflows will be earmarked for offshore opportunities. This still leaves plenty of money to invest in attractive investment opportunities in Australia. AusSuper is agnostic on investing in listed or unlisted companies.
Discussing market conditions, Manuell said AusSuper has been underweight on resources in the domestic market, but has changed this view because at current prices, the sector looks attractive over its longer timeframe, with the sector set to benefit from the themes of energy transition, global reshoring and cyclical rotation.
AusSuper uses proxy advisors for input into their voting and decision-making process, but all decisions are ultimately made by the internal ESG team in conjunction with the internal equity teams. This aligns with the funds approach to ESG, which is focused on ensuring the companies it invests in will create long term value for its investors. “Our approach to ESG is to ensure it is directly aligned to long term value creation. Not all other participants in the market adopt this approach. For some, ESG is more about what they invest in, not necessarily about focusing on stewardship issues once they are invested.”
AusSuper has a large ESG team as a subset of its valuation decisions. Manuell believes that as a long-term investor it’s essential to incorporate ESG into the process. “All components are essential for long term value creation but the “G” is the most important. With good G, the E and S takes care of themselves.” AusSuper does not screen for ESG in stock selection and the only sector exclusion is tobacco. AusSuper does not, for instance, screen for carbon or gaming. “They are important sectors in the Australian economy. We all recognize the issues these sectors have, and from our perspective you want the companies in these sectors owned and managed by responsible people” said Manuell.