Australian superfund consolidation to alter private markets strategies

“We believe there will be a dozen really large super funds and then some niche funds for certain segments,” Deanne Stewart, CEO of First State Super, told the Australian Investment Council’s (AIC) annual forum. “To survive and be one of those large funds, it will be about top performance, using scale to drive down fees, really good member experience, and really good governance.”

First State Super is currently negotiating a merger with VicSuper that would create the country’s second-largest superannuation fund after AustralianSuper, with A$120 billion ($82.5 billion) in assets. More activity is expected following the full implementation of the Protecting Your Superannuation Package legislation, which will require funds to disclose information on inactive low-balance accounts and unclaimed super money with a view to encouraging the consolidation of assets.

However, consolidation has been an industry theme for more than a decade. The number of funds that have at least four members has narrowed from 466 to 198 as of June 2018, the Australian Prudential Regulation Authority’s (APRA) records show. During this period, the amount of capital under management has grown from A$1.1 trillion to A$2.7 trillion, making Australia’s the world’s fourth-largest pool of retirement savings.

AustralianSuper – which had A$145 billion in assets as of June 2018, about 40% more than its nearest peer and about twice as much as the second-largest industry fund – already offers insights into how a cluster of mega superannuation funds might behave. The LP started by bringing much of its listed equities coverage in-house and then did the same, in slightly different ways, for other asset classes. For private equity, internalization essentially means more co-investment.

“AustralianSuper is agnostic towards equities – we take the view that companies are the same and the process you go by to analyze the operations of a company is the same. The timeframe and liquidity are different,” said Shaun Manuell, a senior portfolio manager with the superannuation fund. “As we built the platform, we started co-investing in 2014-2015.”

He noted that Healthscope, a local hospital operator that was targeted last year with BGH Capital – ultimately unsuccessfully but with no shortage of controversy – was AustralianSuper’s 41st co-investment. The first 40 were overseas, so attracted less attention.

Co-investment meets one of the objectives of internalization by bringing down costs. It is all about establishing what can be done in-house on a fixed-cost basis and whether that leaves more room in the management expense ratio (MER) budget to work with partners in other areas. Hostplus has the same goal but seeks to reach it in a different way.

“We need to spend our MER budget sensibly and we would look to pay less in fees because reducing fees is a risk-less return for our members,” said Sam Sicilia, CIO of Hostplus. “So there are two ways you can do it and either way [the managers] lose out. But you get terminated the Shaun Manuell way or you survive and give a fee discount my way.”

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• Topics
• Australasia
• LPs
• Australia
• AustralianSuper
• HOSTPLUS
• Australian Investment Council (AIC)
• Co-investment