This paper considers the involvement of Australian superannuation funds (super funds) in Australian private market investments, with a particular focus on Australian venture capital, Australian agriculture, and Australian social and affordable housing.
The superannuation industry and private markets
It is evident Australian superannuation funds are strong participants and investors in Australian private markets, particularly real estate and infrastructure, despite a range of impediments that have made investing in these sectors increasingly difficult. However, investment in Australian venture capital and Australian agriculture is low and remain niche sectors, whereas these may be considered mainstream in other large developed markets such as the US and Canada. Superannuation fund investment in affordable housing has also been very limited. Historically, these latter three sectors have been inhibited by poor return for the level of risk taken on. This paper highlights numerous factors that have not only fed into this view, but other inhibitors and constraints that will influence the level of capital that is invested into these markets by superannuation funds. We also touch on potential steps to help alleviate some of these constraints.
Your Future, Your Super and the focus on fees
The two more recent factors which have impacted greater participation by superannuation funds in all private market asset classes in recent years are the increased focus on fees and how they are defined by the regulator, as well as the Your Future, Your Super (YFYS) performance test. While the intent of these regulations is logical and understandable, in application they likely have unintended adverse long-term impacts. This includes limiting capital investment by superannuation funds into Australian research as well as companies focused on science, technology, engineering, and manufacturing. This can have secondary repercussions (such as the inability to grow or sustain high skill industries, challenges developing manufacturing capabilities, difficulty obtaining self or supply-chain sufficiency, and challenges attracting skilled talent) that may be less beneficial for the Australian economy as a whole.
Superannuation policy settings
Another key factor for Australian private markets investments is stability of policy settings regarding superannuation. In the case of private markets, investments are long-term and illiquid. Uncertainty regarding future policy can make it more difficult for superannuation funds to make long-term and illiquid investments. Stability within the sectors superannuation funds invest into is also important, as a lack of confidence in the regulatory or policy environment around certain asset types will encourage the capital to be allocated to other more stable assets or even to assets outside of Australia. This would be a detrimental outcome if the largest pool of Australia capital were not able to invest in its home market and help nurture new industries.
In the case of affordable housing, insufficient operational revenues, scale, planning and development risk have impeded superannuation fund investment. Fundamentally, the gap between social and affordable rents and market rents must be closed through some form of scalable government financial contribution to achieve a commercially viable return. Lack of consistency with respect to government policy support and targets for new social and affordable housing has meant there has been no investment pipeline to consistently allocate capital to, even if the risk/return challenges can be overcome. Relative to other jurisdictions, another impediment has been a lack of available built investment opportunities. Superannuation funds typically prefer investing in existing assets rather than greenfield projects. In the cases where superannuation funds are willing to consider greenfield investing, development risk is typically perceived to be excessive. However, recent reforms and greater proposed government spending are a step in the right direction in terms of encouraging private participation (and more specifically superannuation fund investment into the sector).
Australian venture capital
Australian venture capital has strengthened considerably in recent years, with the quantum of capital flowing into the asset class increasing significantly. However, the capital flow is uneven and there is still a lack of capital for the development and commercialisation of technologies that arise from Australian universities and research institutes. We believe governments and the Australian venture capital industry can do more to encourage greater capital participation in hard technology and commercialisation processes.
Australian agriculture also faces challenges that have restricted superannuation involvement in the asset class. As with the broader private markets sector, the focus on fees and YFYS pose challenges. The lack of detailed investment relevant data is another key challenge and governments could support initiatives to improve this situation.
While there are numerous factors that limit the level of Australian superannuation fund investment in Australian private markets, there are identifiable and practical steps governments could take to help address some of these issues. Most important and wide-reaching would be reassessment of Regulatory Guide 97 (RG 97) and the YFYS legislation. Beyond these, we have identified a range of specific initiatives per asset class for governments and industry stakeholders to consider.