Profile: Cook Islands Super's David Brown

It will take David Brown four months to reach the Cook Islands. Having waited 12 weeks for a slot in New Zealand's quarantine system, he and his wife relocated from Melbourne to Auckland in mid-February. After four weeks there, it is on to Rarotonga, famed for its white sandy beaches. Brown doesn't know when he will be able to visit friends and family in Australia again.

"Being stuck in the Cook Islands sounds like a quality problem, but we are in a post-COVID world and you can't just buy the next ticket home," Brown says. "It's a bit sobering signing away the rights to health, repatriation and consular support offered by your country of citizenship. Moving internationally isn't impossible, but it's not easy. Few people are traveling so they don't experience that degree of complexity."

This willingness to endure logistical inconvenience reflects Brown's passion for his new job as CIO of Cook Islands National Superannuation Fund (CINSF), a 20-year-old pension fund with nearly $200 million in assets. This extends a career path dogleg that saw Brown – who had until then worked in Australian institutional fund management – venture into the Pacific Islands in 2015.

It has not been an entirely smooth ride, notably including being arrested, charged, and ultimately cleared of fraud in Papua New Guinea (it took six months to resolve but no one was surprised by the outcome, Brown maintains). Nevertheless, he is happy in this new niche: "It was nowhere I expected to go, but I've enjoyed it. I've worked with some great people."

Advocate for alternatives

A New Zealander by birth, Brown graduated from the University of Auckland and immediately headed overseas, first to Australia and then to the UK. After 10 years in Scotland, latterly working for Standard Life Investments, his Australian wife agitated for a return to warmer climes. They relocated to Brisbane in 1998 and Brown got a job with Queensland Investment Corporation (QIC).

Initial tasks included laying the groundwork for infrastructure and private equity investment programs to be implemented by QSuper. At the time, direct real estate was the best established of the private asset classes. Some superannuation funds had experimented with domestic venture capital, but the likes of QSuper faced two key challenges: they were so large that VC wasn't an option, they had to go offshore; and private equity was expensive relative to other asset classes.

"MLC immediately went for a global program," says Brown. "They also sold their real estate to buy global private equity because they felt if you were going to use a modest illiquidity budget in a money purchase DC [defined contribution] system, you needed to make your illiquidity budget punch above its weight. So, they went for the highest returning asset class, which was global PE."

It took several years to convince QSuper to do the same, relying on supporting materials that went beyond the basic usefulness of private assets and the mathematical context of the portfolio mix, to cover implementation strategies. Even then, there was a tension between listed and unlisted assets: they utilize different concepts and valuation metrics, which results in separate ways of thinking that can be hard to reconcile.

"As a strategist, I was attracted to the possibilities that could come from private equity and infrastructure," says Brown. "But the PE industry is often introspective and doesn't understand the strategic fit. Meanwhile, a lot of superfund CIOs come from a listed background and they don't understand how to fit in private markets. Boards might be supportive, but they find the regulator and the construct of the industry difficult to fit into operations."

In 2006, he was recruited to head up private markets at Victorian Funds Management Corporation (VFMC), which wanted to replicate the QIC approach. The private equity program tripled in size, with a focus on operational change strategies in the middle market rather than leverage-driven big buyouts. As a result, the portfolio held up reasonably well through the global financial crisis and private equity was one of VFMC's better-performing asset classes over the next several years.

But the virtues of diversification failed to hold sway. The combination of the Cooper Review, post-global financial crisis concerns about liquidity, and a renewed focus on fees prompted many superfunds to dial back their private equity exposure. In 2011, VFMC decided to stop making new commitments to the asset class and concentrate on infrastructure instead, leaving Brown out of a job. In a strange twist of fate, private equity coverage was outsourced to QIC.

It is difficult to single out individual LPs for criticism when one might argue that Australia's entire pension system is stacked against private assets. Superfunds are overwhelmingly DC in nature. Unlike defined benefit (DB) models, trustees are not responsible for pension liabilities, so there is a tendency to play safe rather than take on risk in the expectation of higher returns. Members can also move their pension savings between providers, which discourages illiquid exposure.

"In a competitive DC landscape where you compare products based on fees, you have to say there is a certain logic to what the Australians were doing. But from a total outcomes point of view, my guess would be that DB funds performed better," Brown adds. "The dilemma was that having enough PE to move the dial on performance would kill your fee budget, so allocations not only remained small, but also insignificant in terms of delivering meaningful outcomes to members."

A new direction

On departing VFMC, Brown's career meandered. This period included a stint as chairman of the Australian Private Equity & Venture Capital Association – now the Australian Investment Council – and M&A advisory work. Then an opportunity presented itself at PacWealth Capital, investment manager for the National Superannuation Fund of Papua New Guinea (NasFund), the largest private-sector superannuation fund in Papua New Guinea (PNG).

"At a time when there wasn't a lot going on for the sort of programs I ran, it was remarkable. The job description was exactly what I do – strategy, a full fund, direct investments, private equity flavor. My wife said to me, ‘That's your job.,'" Brown recalls.

He spent a year as CIO of PacWealth before taking on the same role at NasFund. As of 2019, NasFund had PGK5.2 billion ($1.5 billion) in assets, with heavy exposure to brownfield property and infrastructure, dividend-generating equities, and bonds. Non-yielding illiquid assets, such as private equity and greenfield property and infrastructure, accounted for 7% of the portfolio.

Most national provident funds and superannuation funds in the Pacific Islands are modeled on their Australian and New Zealand counterparts. Mandates vary, but Brown observes that they are generally well-regulated with governance systems like those in other markets. Many of NasFund's members are skilled employees of international companies from sectors such as mining and financial services that have PNG operations and local pension schemes.

"Banks and super funds in most of these countries have strong regulation," he adds. "Think of frontier markets investors in the listed space. They like investing in banks because these institutions are well regulated and the accounting and governance standards tend to be global best practice. Regulation amounts to reassurance that they will transcend domestic politics."

At the same time, a superannuation fund operating in a relatively small economy that lacks mature capital markets inevitably becomes a linchpin of the financial services ecosystem. The fund will have to allocate more capital offshore and then build up substantial off-market positions onshore, typically direct holdings in real estate and operating businesses. They are too big to fail and too big to be inconspicuous, which means activity is closely scrutinized and sometimes politicized.

Unfortunate action

Brown was thrust into the spotlight as NasFund CIO in 2018 as an indirect consequence of what he describes as regulatory weakness in PNG's securities industry. The Securities Commission had been spun out from the government as an independent entity three years earlier and the transition left it under-resourced.

NasFund is the largest shareholder in a unit trust managed by Melanesian Trustee Services (MTSL). The most recent set of accounts were two years old and they showed a 30% decline in asset value, but the unit price was unchanged. Brown wrote to MTSL asking for clarification. MTSL then lodged two complaints with the police fraud squad – one alleging that the Commission had conspired with NasFund to have MTSL removed as a trustee of the trust and another that cited Brown specifically.

"There was no uncertainty as to how it would resolve, the uncertainty was to when," he says. "That was a lesson for us as a board. Many of us knew about civil litigation but no one had been involved in criminal litigation. It's rare for any super fund. It was a slow process and that was a tactic. It was frightening and there as a period when we tested our business continuity planning."

Ironically, a court hearing at which the prosecution called for the confiscation of Brown's passport took place shortly before he was scheduled to appear, alongside the prime minister of PNG, at an event in Brisbane that focused on inbound investment. He appeared in court in the morning, heard a judge rule there would be no conditions on his bail, and flew out the same afternoon.

In early 2019, following 12 separate hearings, the criminal charge was thrown out based on a lack of evidence. Speaking after the ruling, the chair of NasFund rued the distress endured by Brown and his family, as well as the disruption to NasFund's business, in defending "an obviously spurious charge."

Brown notes that, if anything, the experience bolstered his reputation locally for good governance even though it takes some explaining overseas. "I've heard not dissimilar stories from people who worked in other developing countries. For me personally, it's a curiosity and makes for some good stories after a few beers," he says. "But you can labor the point. In developed markets, they don't understand it, so you have to spend a lot of time explaining the inexplicable and the exotic."

Throughout his time in PNG, Brown's family had remained in Australia, so after five years, there was a desire to be reunited with them. He got a job with Christian Super, helping on a couple of projects involving directly held assets. That came to a natural end last year amid the lockdowns, given Brown was based in Melbourne and the rest of the Christian Super team is in Sydney.

CINSF reached out having already collaborated with Brown on projects when he was at NasFund. The fund is unusual among its Pacific Islands peers in focusing solely on listed assets in offshore markets, with investment decisions outsourced to New Zealand-based Russell Investments. CINSF's board recently decided that the asset base was large enough to warrant an in-house CIO. Part of Brown's brief is to develop local investment talent.

Looking forward

Brown credits the organization with thinking about where it wants to be and putting the requisite building blocks in place to get there. A lot of pension plans fail to do this and are left playing catchup, he contends. This often stems from the board level, where different stakeholder groups – national government, state government, employers, members – struggle to agree on definitions and parameters in areas like governance and risk.

"There are dynamics to governance in pension fund investing that don't always map to ideal investment decision making because there is an overarching sense of caution when it comes to other people's money," he explains. "There is some great research now about what makes a good pension fund – how you create an investment governance framework around making the right decisions at the right time – but it has only emerged in the last 20 years."

The implication is that, having seen the same discussion in Australia result in strategic decisions he didn't necessarily support, Brown would like to help shape different outcomes in the Pacific Islands. And this could be to the benefit of asset classes like private equity, where conviction comes from looking past near-term costs to longer-term returns. GPs have a role to play in this as well as LPs.

"Good investment decisions can be made about PE with the right framework in place," he asserts. "However, I think a lot of the perception problems private equity has come down to a misunderstanding on both sides. There is an awful lot the private equity industry could learn in terms of how to present itself and how it fits within the context of institutional investors."

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• Topics
• Australasia
• LPs
• Australia
• New Zealand
• Pacific Islands
• QIC
• Victoria Funds Management Corp