Super funds call on industry to get creative
Superannuation funds expect to increase their support for private capital
but want the PE and VC industry to present them with more creative
investment opportunities, according to some of Australia's largest funds at
the AIC 2019 Conference.
Hostplus CIO, Sam Sicilia, said funds will increasingly invest in private
markets because the bulk of the world's assets are unlisted, however, he
called on the industry to change.
"If you persist with the old model – that we raise capital, invest,
harvest, get my fees, raise the next fund – that might be a short-sighted
approach," he said.
Sicilia suggested the industry could create entirely new investment
structures. For example, the PE industry could create vehicles that keep
companies private forever as some funds don't want to divest.
"Do we create a private exchange, for want of a better term, that has a
group of sovereign wealth funds and large Australian pension funds and
others that contribute capital for the sole purpose of keeping those
Another possibility he raised was industry helping develop stronger
ecosystems around universities to commercialise their work.
"Rather than waiting for investee companies to be created by other people
and for you to assess them in order to invest, why don't you help them
AustralianSuper Senior Portfolio Manager, Shaun Manuell, also backed the
call for more creative investment opportunities.
"We've created an environment where there's incredible amount of capital.
What we want are people knocking down our doors and giving us really good
options to allocate that capital to."
First State Super CEO, Deanne Stewart, said private capital will need to
become more aligned with super funds as they grow bigger and focus on the
"It's thinking about how is value created: Is it created with imagination
and creativity? Is it created for the long term… it isn't just about
burning and churning so whether that's stripping out costs, getting rid of
people, making short-term profits, that will not be the focus of these
AustralianSuper was the top performing super fund over the decade ended
June 30, 2019 (9.8% p.a.), followed by Hostplus (9.7% p.a.), according to
. First State Super has also performed well, earning a place in the top 10
Investors embrace the new normal
Sicilia said central banks were fighting a futile battle to return
inflation and interest rates to pre-GFC 'normal' levels.
"We're likely to be in the environment that we're in now, forever – there
is no storm. You have to keep investing in the environment that you have at
any point in time. The reality is that those other days, they're gone."
Sicilia joked that the simplest solution for central banks to revive
inflation was to "switch off technology."
"Technology is massively deflationary – we know that – and it is the root
cause as to why we don't get inflation anywhere in the world," Sicilia
Hostplus and other super funds such as First State Super have become strong
institutional supporters of the VC industry in recent years. Hostplus'
VC investments stood at $1.3 billion in June.
Manuell pointed to two secular trends changing the world: the role of
technology and the ease of capital formation.
"We know that with technology, it is genuinely different this time," he
Partnerships and DIY being embraced by super funds
The call for greater industry innovation across private markets comes as
super funds are reshaping themselves. AustralianSuper has brought a large
proportion of its asset management in-house over the past six years in an
effort to lower costs.
"Listed Australian equities was an obvious one for us. You think back 15
years ago when people were still paying 70-80 basis points – we were able,
on a fixed cost platform, to bring that down substantially."
Those costs savings are then re-deployed in other strategies or
partnerships that the fund believes can boost overall returns.
While Hostplus has not gone down the same internalisation path, Sicilia
said he agreed with the aim of lowering fees but preferred to ask managers
for the equivalent fee discount.
"Either way, you lose out… you either get terminated – Shaun's way – or you
survive, and you give me a fee discount – my way."
Australian super funds are also embracing alternative structures to lower
fees and exert more control over unlisted assets. A recent report by
showed that 47% of local super funds are making co-investments compared to
26% of global pension funds.
AustralianSuper raised some controversy when it teamed up with BGH Capital
to bid for ASX-listed private hospital operator Healthscope and education
services provider Navitas last year.
"We actually started our co-investment program back in 2014-2015 and
Healthscope was our 41st co-investment deal," Manuell said. "It's just that
the first 40 were overseas so no one paid much attention to it."
Manuell said short-term market behaviour was leading to sub-optimal
outcomes which created investment opportunities for AustralianSuper.
"If we think there's a value arbitrage by taking a longer-term view versus
where the market's pricing something in the short-term, we're going to take
advantage of that. That's the beauty of the platform that we've created,
that we can actually do that in our drive to create better longer term
returns for our members."
Super fund industry addresses growing pains
Despite approaching $3 trillion in assets, the Australian super fund
industry is undergoing a significant period of evaluation in the wake of
the Royal Commission into financial services misconduct and a Productivity
Commission report into the sector.
First State Super CEO, Deanne Stewart, said the market was set for another
round of consolidation with the
Protecting Your Super
legislation set to sweep out inactive low-balance accounts in October.
"There literally will be funds that will halve overnight and be left with a
much smaller base and not enough to sustain themselves."
While scale usually delivers greater net benefits to members, large funds
also face challenges investing as they attempt to manage significant
Manuell said AustralianSuper recognises it has an obligation to the
domestic economy, where its more than two million-plus members live. "We
will always be putting a marginal dollar in Australia more so than we would
in other markets," but finding more creative investment opportunities was
Stewart said scale raised investment challenges as well as cultural
challenges. First State Super is currently working through a binding heads
of agreement to
with VicSuper, which will make it the second largest fund behind
"The people and the culture, and all the what I call 'soft wiring', is
actually as critical as the investment side, so we're working through both
Many industry funds have benefited from significant inflows following the
Royal Commission's findings. Sicilia said various forms of the
union-employer representative trustee model had delivered outstanding
"What's important here is that when vested interests around the table all
have their money in the same pot, those vested interests disappear."