LP interview: Media Super

In the A$2.7 trillion ($1.9 trillion) Australian superannuation space, even a A$6 billion fund is a minnow that must play by its wits to survive and thrive. Sometimes this means piggybacking the giants. Sometimes it means leveraging the better vision for niche targets that comes with being small.

With A$5.5 billion in assets as of June 2018, Media Super is just such an investor. The fund employs less than 30 staff, only two to three of which are involved in investment. External support is therefore required in the form of partnerships with other industry super funds as well as the engagement of Frontier Advisors as primary investment consultant.   

“On one hand, being smaller allows us to be nimble in parts of the market like small and midcap stocks in Australia, but at this size, there are things you can’t do unless you do them collaboratively with other like-minded funds because we simply don’t have the dollars to put in,” says Gerard Noonan, chairman of Media Super. “We find it more difficult to take positions in enterprises. In infrastructure for instance, we wouldn’t be able to take a solo asset on our books.”

The fund, which represents workers in journalism, print, entertainment and the arts, is nevertheless ranked among the top performers in Australia’s pension system. For the 2019 financial year, it was the third best performer behind QSuper and UniSuper with an 8.8% return. Both QSuper and UniSuper have about A$80 billion under management. “We’re supposedly the amateurs, but we’ve been at this for 30 years, so we know what we’re doing,” says Noonan.

Allocation games

Media Super was officially formed in 2008 from the merger of Print Super and JUST Super, but its ancestry traces back more properly to the primordial days of the superannuation system in 1987. Noonan, at the time editor of The Australian Financial Review, was involved in early discussions around strategy. The trick was to outline a long-dated approach that minimized illiquidity premiums, while maximizing scale with a shortage of internal resources. 

A consistent allocation split of 70% in liquid holdings and 30% in alternatives was established. Traditionally, this has included about 10% in real estate, 10% in infrastructure, 5-10% in private debt and 5-10% in private equity. Most real estate and infrastructure commitments are handled through the Industry Super Property Trust (ISPT) and IFM Investors, respectively. Both firms are owned by dozens of pensions, including Media Super.

Infrastructure has taken a slightly larger piece of the pie in recent years, with the asset class now representing 11% of investments in the form of Australian airports and shipping ports, toll roads in the US and Mexico, and airports in the UK and Australia. New projects also include a local wind farm power asset aimed at enhancing the firm’s environmental, social and governance (ESG) profile.

Green infrastructure investment through IFM has also bled into the real estate strategy, with Media Super backing an ISPT rooftop solar initiative. While the ISPT and IFM collaborations have proven useful in providing Media Super with access to large projects outside of its natural scope, it is becoming clear that sometimes a partner can be too big.  

“Recently, there’s been a bit of pressure to maintain the not-for-profit ethos in these vehicles, because they’re growing,” says Noonan. “In the case of IFM, the amount of money sitting in that fund now is in the order of A$150 billion, so it’s starting to attract talent, and that tends to bring the remuneration practices that are more common in the PE and VC world. That is creating some tension.”

With private equity, the main issue at Media Super has always been fees. Like many of its peers, the fund is obliged by regulators to maintain a fairly high level of liquidity and maneuverability. For example, Media Super is required to regularly stress-test its entire portfolio against crisis scenarios including a theoretical 40% drop in the value of the Australian dollar.

The balancing presence of illiquid assets began gravitating toward infrastructure and away from PE after the global financial crisis in 2008, when a number of investments proved frustratingly inaccessible, even several years after the worst of the storm had passed. The target exposure for PE has subsequently drifted from 5-10% to 2-5%.

“One of the big surprises of the global financial crisis was that it was our best opportunity to reduce fees across the board [but it wasn’t taken],” says Noonan. “Fund managers were getting negative returns and still taking substantial fees for managing assets, but I didn’t see one single instance during the crisis of a reduction in fees for any fund management. I was puzzled that we [the super industry] weren’t able to use what you would imagine was a stronger negotiating position to reduce fees.”

Noonan adds, however, that there has been some progress on fees in recent years due to a combination of competitive pressure and Media Super’s own doubling-down on price negotiations. Still, the fund’s PE position continues to erode, edging below 2% at the end of the 2018 financial year. The portfolio comprises a smattering of commitments to GPs like Archer Capital and CHAMP Ventures, fund-of-funds players ROC Partners and Stafford Private Equity, and secondaries specialist Pomona Capital.

Ethical dilemma

PE has also proven philosophically difficult to reconcile with Media Super’s growing commitment to ethical practices, especially regarding industry use of offshore tax havens.  “Increasingly, that does not sit comfortably with our membership. It might be tax-efficient, but occasionally, it also looks like tax avoidance,” says Noonan. “When you’ve got a shopfront in Bermuda or the Cayman Islands and it’s actually a legal firm acting as a clearinghouse for the finances of PE firms, there is a lack of transparency.”

Media Super has been ramping up its ESG activity recently as a member of the Australian Council of Superannuation Investors. This group of about 30 super funds and six international pensions is now calling yearly meetings with top-200 companies in Australia to hold them to account on sustainability issues. Noonan says gender-balanced boards, inflated executive salaries, and fat termination packages for failed executives are on the agenda. And the fund is voting with its shares.

“We, as fiduciaries, must answer to our membership about where their money’s been invested, how it’s been invested and to what degree we’re taking into account ESG issues,” says Noonan. “But when the entity is domiciled in a tax haven, you can’t find out how the underlying investments are performing in a reasonable manner. That has been as big of a factor as the global financial crisis in having our board become more wary of pure PE plays.”

There is, however, an interesting postscript to this story of PE denial that could go on to be the start of a whole new chapter: venture. Media Super has demonstrated a growing ambition to play in the VC space with the launch of a A$30 million R&D fund and a separate A$20 million innovation-focused co-investment vehicle. And the DNA of the fund offers a clue this strategy may gain momentum, albeit in a measured way.

Noonan served for six years around the early 2010s as chair of the VC committee for the government’s Innovation Australia program, honing insights in risk-capital investment but also bearing witness to the fallout of the dotcom bust. During this period, super funds appeared to be among those worst burnt by aggressive entries into speculative segments.

“The tales of woe were multiple, and the super industry shied away from VC almost totally,” he says. “Now, there’s a rising tide led by the larger funds but also including smaller funds like us. We’re looking for innovative investments in media as we transition from legacy newspapers and magazines into the digital world.”

For now, Media Super groups its VC-style initiatives in its “opportunistic” category, which includes creative PE and debt plays in niche areas relevant to fund members. Examples include a rolling loan fund for Fulcrum Media Finance that has contributed A$160 million to the production of about 130 movies since 2010. Investments are not dependent on likely success at the box office. Fulcrum finances studio work via Media Super’s loans, which are repaid plus fees when production is complete and a tax offset for the film industry kicks in.

The success and popularity of Fulcrum among Media Super’s 80,000 members precipitated an investment in the ACO Instrument Fund, which acquires rare and antique instruments for the Australian Chamber Orchestra. The current portfolio includes two violins and a cello from the 1600s and 1700s worth a combined A$7 million. Is this kind of activity – along with the fledgling innovation agenda – a sign that the firm could follow the broader super industry into VC fund commitments?

“This is toe-in-the-water stuff for us at the moment,” says Noonan. “If we go further down the track with this, we would need to establish a structure that would look like a GP structure.”

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• Topics
• Australasia
• Infrastructure
• Venture
• LPs
• Australia
• Media
• ESG