Big super funds are ramping up private investments, but some industry players are cautious
As the ecosystem around Australia’s private markets develops and matures, an important group of investors have become increasingly involved.
Australia’s superannuation funds — led by the bigger players — have taken material steps to include private investment opportunities in the construction of their portfolios.
Australian Super was a key player in last month’s $2.3 billion acquisition of education provider Navitas, which took the company from the ASX boards back into private hands.
And HostPlus — a $44 billion fund representing the hospitality industry — maintains an investment float of more than $1 billion dedicated solely to venture capital opportunities.
Following the Navitas bid, which was led by private equity firm BGH Capital, Australian Super said it’s likely to partner up with PE firms in the future to get in at the ground floor on similar deals.
While the shift towards new private allocations looks to be here to stay, it’s not a foreign concept to the sector.
For example, super funds have consistently allocated capital to investments that require a long-term tie-up of funds, such as infrastructure projects.
But the recent developments mark a clear strategic focus which will undoubtedly factor into the outlook for Australia’s private markets.
At the same time, industry leaders have also expressed a note of caution when it comes to private investment opportunities.
Con Michalakis, chief investment officer at $8 billion industry fund Statewide Super, highlighted the risks associated with illiquid investments in a tweet last week:
Ok personal view (ducks for cover). We’ve learnt ZERO from the gfc and lessons from the near lockup by funds like MTAA and access capital advisers
— Con Michalakis (@MichalakisCon) June 29, 2019
Car industry fund MTAA lost around $1.6 billion in the wake of the 2008 financial crisis, when it was caught high and dry holding illiquid infrastructure investments.
As one of Australia’s smallest super funds, Student Super sits on the other end of the spectrum to the behemoths.
But when it comes to private investments, CEO Andrew Maloney said he takes something of a “contrarian view”.
Speaking with Stockhead, Maloney said the appeal of private investments was derived in part from the pressure to maintain consistent returns.
“Any fund manager will tell you the more money you run, the harder it gets to generate alpha,” he said.
Private investments are typically calculated with a higher return, which is partly to account for the illiquidity premium inherent in the valuation.
“Private assets should outperform a lot of other assets. And that can be all true, but at the same time you don’t have a highly liquid market to transparently value the asset. So you can end up with a wide range of valuations — a lot of which are pretty defensible,” he said.
But ultimately, as a super fund, Maloney thinks you “shouldn’t be allowed to mark your own homework”.
It forms part of Student Super’s philosophical investment view, derived in part from extensive market research on its target age demographic of between 16 and 26.
“One of the big complaints is lack of transparency — so I think as a fund you’ve got to be transparent with your fees, and your valuation,” he said.
The fund deploys a simple investment structure based solely on true index investment products via Macquarie Bank. The indexes deliver returns across various traditional asset classes such as global property component, Australian equities and emerging market stocks.
Maloney said due to the prospect of higher returns, private investments would continue to attract the attention of super funds. But he cautioned that excess capital could also create distortions in the local market.
“The big thing is transparency, and that’s where I think infrastructure and private equity have problems because they’re both markets where there’s no transparent valuation.”