“Forget all the noise. It’s about returns,” says Michael Lukin, group managing partner at Roc Partners, when asked why investors should care about private equity. “It is fundamentally a way to generate higher alpha from your portfolio than any other asset class.”
Lukin has watched the industry evolve over 25 years. He has seen hype come and go, but one thing endures: long-term outperformance by good managers investing in the right part of the market. For Roc, that means the Australian mid-market.
“Everyone thinks about private equity as one asset class,” he says, “but it’s really a bunch of asset classes or a bunch of exposures that sit below the surface.” At the top, you have global mega buyouts, “busses,” as he calls them; large, slow-moving vehicles that struggle to generate differentiated returns. At the bottom, there’s venture capital, or “cars that may never get out of the lot.”
Roc prefers the vehicle in between. “We focus on what we call mid-market private equity,” Lukin says. “These are businesses that sit above the mum and dad operation. They’ve got a CEO, maybe a CFO, but maybe not the entire C-suite built out.” This is where private equity can add operational value, plug funding gaps and drive transformation.
The firm’s sweet spot includes founder-owned businesses looking to scale. “One of the best sources of deal flow is a founder saying, ‘I want to roll JB Hi-Fi out of Victoria.’ That might require capital, systems, and help building a professional management team.”
Succession is another structural theme. Lukin describes “a great source of wealth clients in this country” as families whose children have no interest in taking over the business. “They’ve all gone to private schools, become bankers and lawyers, and don’t want to run a waste management business in Western Sydney.” Private equity steps in, buys the asset, and the capital recirculates through wealth managers and family offices.
But what makes the mid-market compelling is not just opportunity; it’s the lack of competition. “More than 80 per cent of companies in Australia with revenue between $10 million and $250 million are privately held. There might be a dozen people in the country seriously looking at them.”
The comparison with listed markets is stark. “If you’re now a $500 million company in Australia looking to list, you’re in no man’s land,” Lukin says. “You’re not big enough to be in the S&P/ASX 300, so you get no volume, no liquidity and no analyst coverage.”
Concentration risk is another concern. “If you’re an Australian public equity investor, half your portfolio is in banks and miners. I don’t know the last time I read that banks and mining companies were the future of growth in the world.”
Private equity, by contrast, offers scale and diversification, if you get the manager right. “In unlisted markets, the spread between top- and bottom-quartile managers is 1000 basis points. In listed equity, it’s two or three per cent. So choosing the right brand is really important.”
Performance in private equity is persistent, Lukin argues, because it’s based on replicable skill. “If I have a playbook around how I take a family-owned business and grow it, that’s something I can rinse and repeat. There’s no equivalent of that in listed markets.”
Still, the traditional model – think long lock-ups, capital calls and illiquidity – doesn’t suit every client. “Think of it as the classic car in the garage. It’s the Rolls Royce. It’s what the family offices, the Harvards, the Yales (that is, university endowments) use. But it’s not the everyday car to take the kids to school.”
What is emerging, Lukin says, is a more flexible structure: open-ended vehicles that offer ongoing deployment, smoother return profiles and simplified access. “It’s the ability to press a button and get to your target asset allocation, with great diversification, great vintage exposure and long-term compounding.”
For Lukin, the conclusion is simple. “If you pick the right brand, you can continue to see outperformance over the long term in this asset class.”