Global firm plans to step up local co-investing

By Adrian Herbert

The private equity business of global asset management firm Federated Hermes plans to step up its private capital investing in Australia, co-investing in selected deals led by local general partners (GPs) including Colinton Capital Partners.

With a two-decade long track record of co-investing, Federated Hermes Private Equity is no stranger to Australia having previously co-invested in deals led by other local private equity firms including Pemba Capital Partners.

The Pittsburg, Pennsylvania, headquartered firm has $6.4bn in assets under management including allocations from Australian institutional investors including industry superannuation fund Hostplus and maintains a Sydney distribution office.

Federated Hermes Private Equity is focusing strongly on the Asian region right across its portfolio, based on projections that growth in the region will outstrip the rest of the world. Alongside this, the firm is seeking to follow regional megatrends including decarbonisation, technological innovation, demographic shifts, an expanding middle class, premiumisation and localisation.

Singapore-based Federated Hermes head of portfolio management, Christian Mankiewicz, told me recently that the firm was keen to increase its private equity investing in Australia and New Zealand both at fund level and through co-investments.

Using the opposite approach to many global investors, Federated Hermes generally starts manager relationships through single direct co-investments, Mankiewicz said, and would later consider backing new funds. The firm liked working this way, he said, because it provided opportunities to see how investment teams worked.

The firm particularly favours backing next generation funds; those raised by emerging fund management firms formed by individuals who had gained experienced in established firms. Federated Hermes has backed 65 such managers over the last ten years and found they achieved stronger growth than established managers.

The firm is open to considering co-investments in deals led by any fund manager but the deals have to meet overall strategies.

For a start, Federated Hermes Private Equity focuses on mid-market growth investing – typically investing in companies with enterprise values averaging $US200 million ($304 million) – and stays clear of large-scale private equity and any deals that require high levels of leverage.  

Investments also need to be structured to take advantage of long-term sectoral growth trends and should not rely on cyclical swings.

The firm favours investments in businesses serving general consumers and looks for growth trends of 10%-15% established over a few years. It will back minority as well as majority investments and particularly favours roll-up and consolidation strategies.

Sectors which the firm sees as providing special opportunities include climate mitigation and regulatory management.

Federated Hermes recently led a $US25 million ($38 million) plus investment round in Singapore corporate governance and compliance services company Xcelerate.

The company plans to use the new capital for strategic acquisitions and to accelerate its organic growth.

The funding round was supported by existing investors, Singapore-based private equity firms Altair Capital and Exacta Capital Partners.

Xcelerate, which was founded in 2021, says it has achieved significant penetration of social compliance and risk management sectors in India and plans to expand into the Asia-Pacific region, and other markets, in the near future.

Image: Federated Hermes head of portfolio management, Christian Mankiewicz.