A heavy hand

Many will be hoping this week's decision to postpone introduction for another 12 months, allowing for a full consultation, ultimately results in substantial amendments.
To put the disclosure framework in a private equity context, it requires superannuation funds to reveal not only the identity of funds in which they are invested but also details of each fund's portfolio holdings. This information would be posted online on a twice-yearly basis. The closest the industry has to a global standard - disclosures made by US public pension funds - stops short of naming the specific contents of PE managers' portfolios.

The new Australian system threatens an ugly impasse between foreign PE firms and superannuation funds, potentially resulting in the former refusing to do business with the latter. Several superannuation funds responded by requesting side letters for new commitments to GPs entitling them to disclose the relevant information if and when necessary. Fund formation counsel for GPs told AVCJ they were advising clients to refuse to acquiesce, citing confidentiality arrangements in limited partner agreements that specifically restrict the disclosure of commercially sensitive information.

The rules were drawn up with the best of intentions but apparently with little thought to the realities and practicalities of private equity.

A post-global financial crisis review of Australia's finanical services sector identified several areas of improvement in the superannuation system. These included a removal of the complexity and opacity surrounding investment products, with more information on superannuation funds' processes and holdings put into the public domain.

What they ended up with was overregulation. Domestic GPs apparently have little choice but to comply as they are bound by more stringent Australian securities laws. But if foreign managers cut off dealings with LPs subject to these disclosure requirements, the superannuation members would be the ones to lose out by potentially being denied access to the best-performing funds.

The burden of compliance would also be beyond anything superannuation funds have seen before. It is estimated that disclosing the full extent of each manager's holdings would create a list of 5,000-10,000 line items. In its 2013 annual report, AustralianSuper merely gives the names of 34 external managers for listed equities, 21 for global bonds, 32 for property, 30 for infrastructure, seven for capital guaranteed, absolute returns and cash, and 14 for private equity.

Even if the government is comfortable with costs involved, it is debatable whether or not full disclosure benefits superannuation members. A balance must be struck between giving end users access to information in the interests of transparency and overwhelming them with so much information that only those with accounting backgrounds will be able to handle it.

Given the rules have yet to enter circulation or the regulators offer full implementation guidance, there are countless unknowns.

For example, it has been suggested that superannuation funds make a "reasonable steps" defense, saying they have tried and failed to access the information required. However, it is unclear what this would mean for new commitments - they would be investing in the knowledge that they can't comply - or for confidential information that LPs receive as matter of course through quarterly reporting. Similarly, there are several interpretations of how holdings would be displayed, which may limit the amount of actionable information released.

When AVCJ asked superannuation funds where they stood on the disclosure issue earlier this year, several said they had reached "an agreement to agree further" with GPs. This may have been shorthand for: "We want this regulation to go away; we think it will go away; so let's just wait and see what happens."

They are still waiting, but perhaps there is light at the end of the tunnel.

 

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• Australia
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