Colonial First State eyes US private equity deal to bulk up returns

One of the best investments in the 20 years is buying and selling domestically focused US companies which are likely to be ‘far less exposed to the impacts of tariffs’.

Colonial First State chief investment officer Jonathan Armitage.

Colonial First State is gearing up for its first big private equity push as the $160bn wealth manager boosts its unlisted exposure in the US and European markets, where returns are superior to shares.

Chief investment officer Jonathan Armitage is looking to take advantage of the “dislocation valuations” in certain parts of the market, particularly private ­equity. CFS is aiming to make two times its money in the private ­equity space, with an internal rate of return in the high teens.

“We are looking at an opportunity to deploy some money into a private equity secondary transaction which would be focused on lower middle market opportunities,” Mr Armitage said of smaller companies less susceptive to tariff pain. “The exposure will be to the US; we think the lower middle market offers a wider range of investment opportunities and the ability to generate more attractive returns than larger trans­actions.

“The focus will be in technology, healthcare, business services and financial technology and infrastructure,” he said.

He declined to say more about the “live transaction”, which is not yet finalised.

CFS, one of the biggest super funds in the country, is 55 per cent owned by private equity giant KKR and 45 per cent by Commonwealth Bank.

As part of its ramp-up into the hot unlisted space, it pumped hundreds of millions of dollars into private credit in the past year. It expects to be “fully deployed” within the next year.

To date, CFS has only a very small allocation to private equity.

This will change as it targets buying companies with revenue of between $US1m and $US40m – the most appealing bracket, ­according to Mr Armitage.

“In that segment, you’re providing capital to primarily domestically focused companies, particularly in the US. We think they are going to be far less exposed to the impacts of tariffs and over the last 20 years or so … these opportunities represent some very attractive investments for our members to participate in,” he said.

Listed equities still make up the majority of the fund’s assets, and it was this exposure that helped the fund deliver returns exceeding 17 per cent for its MySuper members in calendar 2024, above its peer group average.

For this financial year, Mr Armitage said the fund would likely achieve high single or low double-digits. That puts it in line with the average fund performance.

Even after the April sell-off sparked by Donald Trump’s Liberation Day, a rebound in the weeks since means the median growth super fund is on track for a desirable return. The median growth option returned about 8.6 per cent over the financial year to the end of May, according to research house Chant West.

Returns in the next few years would revert to their long-term average of between 6 and 8 per cent annually in a more challenging macro environment, Mr Armitage predicted.

The US administration’s policies, including tariffs and spending cuts, were already having an impact on businesses in the US and that would hit earnings in the near term, he added.

“We think a bit of caution around valuations in equity markets, particularly in the US, is warranted. And so where it’s been appropriate, we have been looking to add protection over the ­equity exposure we’ve got in our various investment options.”

These protections include derivatives, he said. Derivatives are financial instruments used to hedge a position to protect against a potential loss.

While Wall Street is looking stretched, valuations in Japan and Europe are more attractive, Mr Armitage said.