Australian super funds warn of regulatory impact on PE - AVCJ Forum

"Momentum is positive and I would like to think it will continue that way," Andrew Major, general manager for investments at HESTA, told the AVCJ Australia & New Zealand Forum. "Trustee boards see short to mid-term performance and listen to us saying ‘Don't worry about what is happening now but in 5-7 years.' Giving decision makers the confidence and comfort to wait that period is critical."

HESTA has A$26 billion ($23.4 billion) in assets under management, of which 4% is committed to private equity. Major doesn't expect this percentage to change, but the superannuation fund has altered its approach in recent years. Having started out backing fund-of-funds, it now works with advisors and makes primary commitments, as well as co-investments and secondary investments to mitigate the j-curve effect.

Clive Boyce, investment manager at Funds SA - which has A$1.3 billion invested in private equity out of a total asset base of around A$24 billion - agreed that superannuation funds are staying the course yet modifying their approach. "It is a matter of evolution rather than revolution," he said.

The general consensus is the impact of the MySuper legislation, intended to reform the superannuation industry and deliver easily comparable products with a competitive focus on net costs and returns, has now largely been absorbed. There is an acceptance that regulation will increasingly become a way of life for managers and this requires investment in the appropriate reporting infrastructure.

However, there remains a lingering dissatisfaction with how the debate has moved. Stephen Milburn-Pyle, general manager at Australia Post Superannuation Scheme, observed that the focus was supposed to be on controlling the cost of product distribution and sales but it then transferred to the costs of manufacturing a portfolio.

Michael Weaver, portfolio manager at SunSuper, added that this has resulted in a race to the bottom, with domestic banks - whose retail funds were a principal target of the MySuper legislation - launching index funds and marketing them against industry superannuation funds on a cost basis. "It costs nothing to manufacture the investments compared to the disclosure regime we are working under," he said.

SunSuper has A$27 billion in assets under management, with 4% in private equity and 3% in distressed debt. Weaver said that private equity must continue to justify its place in a portfolio, competing against property and infrastructure, but the asset class offers exposure to unlisted private companies that cannot be obtained elsewhere.

Australia Post Superannuation, by contrast, is in the process of exiting private equity. The fund operates under a defined benefit structure and the challenge is investing in assets with a different performance cycle to the liabilities that are linked to members' salaries. Private equity was a good fit when Australia Post's payout deadlines were distant, but it closed to new employees two years ago and now requires liquid assets.

While it was actively investing in private equity, Australia Post had up to 40% of its core strategy allocated to the asset class - extremely high by industry standards. Milburn argues that private equity has effectively served its purpose, but the regulatory environment means it may not do so for other superannuation funds.

"If an industry fund has positive cash flow and young members, having 90% of the assets in liquid form is too conservative," he said. "We tested the boundaries at the other end of the scale and we survived."

The AVCJ Australia & New Zealand Forum, now in its 11th year, continues in Sydney tomorrow. 

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