Could small caps and emerging companies boost our sovereign wealth fund?

Small caps can make investors very wealthy, but can they do the same for our nation?

Australia’s main sovereign wealth fund, Future Fund, was established in 2006 and manages $168bn in assets. According to the Sovereign Wealth Institute this is the world’s 17th largest.

How does it invest?

The fund publishes its top 100 equity holdings annually — it last did so at the end of FY19. Only 23 of its top 100 holdings are Australian listed stocks and they’re all large caps.

Future Fund invests in other assets as well as off-market companies. Just two months ago the fund bought an undisclosed stake in Canberra Data Centres.

Future Fund CEO David Neal said at the time Canberra Data Centres was a “high-quality asset that takes advantage of the powerful secular trend of data growth and cloud computing”.

The fund also has a stake in successful health company CSL (ASX:CSL). It’s the fund’s 5th largest equity holding.

CSL listed at $2.30 in 1994 and is now over $300 — not accounting for 2007’s three-for-one share split.

Future Fund also has $25bn tied up in investments in private equity funds. But it is the private equity firms that choose the investments rather than the Future Fund itself.

Lost opportunity?

Smaller companies are keen for help to get off the ground, particularly capital intensive industries like additive manufacturing.

But it’s a task easier said than done and smaller companies are becoming less keen on private equity and dealing with retail investors.

Anatara Life Sciences (ASX:ANR) boss Steve Lydeamore told Pitt Street’s Life sciences conference last November it was tough being listed as a smaller company in the development stage.

“People want something to happen every quarter and if not they get concerned,” he said.

“The word is starting to get out there but it’s not that easy. We don’t have a budget to spend on PR – we do it on research and development.”

Titomic (ASX:TTT) boss Jeff Lang told Stockhead this week Australia had a great opportunity for its sovereign wealth fund to help companies grow, including ASX small caps.

He pointed to the example of the world’s largest fund, run by Norway, which it built predominantly through oil companies.

“They [Norway] built it off the back of taxing the oil companies – it gave stability to the country and we could do something similar,” Lang explained.

“But we could also help advanced technology startups grow and make Australia front and centre in the future and reduce our carbon foot print.”

No interest … for now

A Future Fund spokesperson told Stockhead the fund’s investment mandate was to achieve returns and not to support other government policies.

“Our role is to maximise risk adjusted returns to achieve our investment mandate,” the spokesperson said.

“We seek out the best investment ideas for the targeted risk and return objectives in a given investment environment and we look broadly at investment opportunities through this lens.

“It is not our role to invest to support other policy initiatives.

“Our Australian equities exposure is through the index. It is worth noting that through our private equity program we are invested in the Australian private equity and venture capital market.”

Australian Small Business and Family Enterprise Ombudsman Kate Carnell told Stockhead the Future Fund had not been interested in funding smaller businesses, although it was far from the only body not interested.

Nevertheless Carnell was hopeful that once the federal government’s Business Growth Fund (BGF) got off the ground the Future Fund would eventually come to the table.

“We approached the Future Fund and bigger superannuation funds and asked ‘why don’t you make a small percentage available to small businesses’ and the silence was deafening,” she said.

“I’m hopeful that once it gets up and running and it’s clear that there’s a need in this space rather than investing offshore, which is what they are doing. They could put a small amount aside for these businesses and they could become part of the fund in the future.

“There’s a range of businesses for whom capital requirements are high, they’re the ones that struggle the most.”

Government support

There is a light at the end of the tunnel for smaller companies, with the Business Growth Fund (BGF) legislation about to go before the senate and most likely be passed. The fund will invest in smaller businesses with high-growth potential.

“The reason this [the BGF] is so important is we were just struggling to get anyone onboard, but the federal government has come to the table and is saying we have to get this thing moving,” Carnell said.

“Hopefully over time other funds will come to the table.”

State governments have played a part too, particularly in relation to sectors they want to grow. For instance, the WA government is currently cooking up a five-year growth plan for its life sciences industry.

Meanwhile in Queensland, the state government wants to build a renewable energy hub in the north of the state. One beneficiary last year was Genex Power (ASX:GNX), which got a $132m funding package.