When IFM Investors launched the latest – and seemingly last – iteration of its private equity programme 10 years ago, one objective was to provide a cost-effective solution for Australian superannuation fund clients. These investors made up the bulk of an LP base that was 100% domestic. Now independent of IFM, the team is readying Fund III and keen to raise capital internationally.

“IFM has deep institutional relationships in this part of the world, and that’s what we were tapping previously. For Fund III, we want to broaden the investor base,” said Adrian Kerley, one of three managing partners who led a spinout from IFM to form Black Kite Partners.

“Australian superannuation funds have been invested in the sector with a strong hometown bias since the 1990s in many cases. They have these incumbent relationships, and they aren’t looking to add more. And as they grow ever larger, they need to deploy more capital offshore.”

Black Kite is targeting AUD 500m (USD 351m) and it has sold an equity interest to Asia-focused GP stakes investor Scarcity Partners to help build an institutional platform. Scarcity has committed growth capital that has gone onto the new firm’s balance sheet – to be used for recruitment among other things – and it will bring operational expertise and its own LP relationships to support fundraising.

Fund III, mark two

This will be the team’s second shot at a Fund III. First time around, they were preparing for an initial close – which included capital from global institutional investors – when IFM announced plans last autumn to exit the private equity strategy, saying it hadn’t scaled sufficiently to be commercially viable. Assets under management (AUM) totalled AUD 1bn, less than 1% of IFM’s overall business.

Fund III subscription documents were torn up, but the team stayed close to investors, especially those that were already in Fund II, according to Kerley. Weekly LP advisory committee (LPAC) calls were held to keep everyone up to speed. “We hope they will roll their subscriptions from the old Fund III to the new Fund III, but that’s an independent decision,” he added.

IFM made clear that its decision was not performance-based, citing a 33% net IRR for the strategy since 2019. Fund I partially predates this period, having closed on AUD 200m in 2016, but Black Kite claims it is the 10th best-performing Australia and New Zealand private equity vehicle of all time. Now fully exited, the fund delivered a net multiple on invested capital (MOIC) of 2.52x.

Fund II closed on AUD 380m in late 2022 with half the capital coming from members of the 27-strong group of superannuation funds that owns IFM and the other half from other Australian institutional investors. It is fully deployed across six investments, of which one has been exited. Black Kite said the total value to paid-in (TVPI) is 1.57x, above the top quartile threshold for Asia funds raised in 2020-2022.

There is also one standalone investment, PRP Diagnostic Imaging, which was intended to be part of a long hold that didn’t get traction. The LPs are a smaller subset of superannuation funds.

Black Kite will continue to manage these remaining investments, with Kerley saying there are no plans for a secondary transaction. The solution – a spinout plus seed capital from Scarcity – is “the best answer for investors, the portfolio companies, IFM, and the team,” he said, adding that ideally the scenario would have played out behind closed doors.

Picking a partner

Kerley and his fellow managing partners, David Odgers and Stuart Wardman-Browne, received enquiries from over 90 interested parties. These are understood to have included secondary investors, domestic and international GPs keen on acquiring a mid-market team, and other GP stakes investors, ranging from multi-affiliate players to sovereign wealth funds seeking a strategic Australian foothold.

The Scarcity proposition resonated, Kerley explained, because it is an arrangement much like those Black Kite pursues with Australian founders: partnerships intended to accelerate the realisation of an existing vision. “Before we had an agreed term sheet, they were finding ways to add value to the process of standing up Black Kite,” he said. “That’s what we look to do with our portfolio companies.”

Scarcity will have board representation but play no role in investment decision-making. While it will facilitate fundraising, the firm will not charge fees for distribution and operational support along the lines of the multi-affiliate model. Twelve people, including eight investment professionals, are moving over from IFM. Scarcity’s seed capital is intended to help grow the team to 18 in the near term.

Asked how Black Kite aims to differentiate itself in a busy Australian market, Kerley points to size and sector specialisation. Fund III is sized to be lower mid-market, a space the firm believes has been vacated by other GPs that have scaled up. The goal is to make eight investments with an average equity cheque size of around AUD 60m. Commitments to individual deals will not exceed AUD 150m.

Black Kite has also restricted its mandate to technology and healthcare; the former encompasses software and technology-enabled services like payments and cybersecurity, while the latter is more health-tech than healthcare services.

“At CHAMP Ventures [where Kerley spent six years through 2016], we used to pride ourselves as being generalist, we could do a bit of everything. That model has flipped on its head. Now, you need deep speciality to create enduring value in businesses,” he said. “The only other specialist in the lower mid-market in Australia is Genesis Capital, which focuses on healthcare.”

Software strategy

There are two software businesses in Fund II, both described as system of record plays. Render’s key asset is a database of fibre network locations throughout the US, which is used by B2B clients involved in construction and maintenance. Tally Group claims to be one of only two global cloud-native software providers in the utilities billing space, alongside UK-headquartered Kraken Technologies.

Black Kite expects artificial intelligence (AI) to have a deflationary impact on software, eating into the competitive moats and pricing power of industry incumbents. But the impact will be uneven. Horizontal software platforms – “that serve as wrappers on other people’s data,” Kerley said – are set for huge disruption. Companies that collect and own data on behalf of customers are more likely to prevail.

This explains the bullishness around system of record, especially where it involves highly regulated end-user industries or mission-critical functions. The team continually tracks competitive moats in the industry, identifying where they are breaking down, and this is seen as among the most resilient.

“Software valuations need to adjust downwards from where they’ve got to over the last 5-10 years, and that’s what the market is reflecting right now. But we like system of record and system of action,” said Kerley.

“If people want to know the location of underground fibre cables, Render is the system of record for that. There is some crucial data ownership. Our job is to build functionality, and we are currently implementing AI on top for field crews and service management.”