personal finance

Australia’s pension titans set to storm private capital markets


Super-sized Australian pension funds that collectively control more than $2tn are expanding their in-house investment teams to join up with or even bypass private equity firms to place big bets on companies directly.

Australia’s superannuation pension industry has undergone a period of consolidation in recent years, leading to the emergence of several “mega supers”. Now, they have the heft to copy pioneering Canadian pension plans and go on an international shopping spree. 

“Over the next decade I wouldn’t be surprised to see the Aussie funds become big players in the investment landscape,” said Con Michalakis, chief investment officer of Statewide Super, an Australian pension plan that manages A$10.8bn ($8.2bn) in assets. 

Large Australian superannuation funds have historically managed most of their mainstream portfolios in stocks and bonds in-house — and focused mostly on domestic markets — while outsourcing their smaller allocations to more specialised areas such as private equity to big US and European players.

But in recent years, industry insiders say the sector’s behemoths have begun building their own private equity teams, as they seek to bring down costs for members. While maintaining internal teams is expensive, it can still be much cheaper than paying the fees that top investment firms charge. 

Column chart of Total assets under management (A$tn) showing Australia's pension system is among world's biggest

After the string of mergers, there are now 13 super funds with more than A$50bn in assets under management, according to KPMG. These economies of scale make it more efficient to build in-house investment teams

“Some of these funds have grown to the size now where they are saying: why would you give someone else money to invest on your behalf versus finding an in-house solution where you would invest that money by yourself?” said Timo Schmid, a partner at consultancy Boston Consulting Group.

Institutional investors around the world are exploring various ways to counteract the gloomier outlook for future returns in equities and fixed income — the backbone of virtually every major investment portfolio. Many have concluded that their best bet is to pile into “private assets” — investing in or lending to companies outside the mainstream, traded markets. 

That has led to a bonanza for private equity, venture capital and direct lending firms. Morgan Stanley estimates that the private capital industry has tripled in size over the past decade to $7.4tn, and forecast that it will swell to $13tn by 2025. But with high fees dragging on returns, some big institutional investors have started to invest in companies alongside private equity firms — or even cutting them out and investing directly.

The pioneers of this approach were the Canadian pension plans. Over the past decade, they have spent $180bn acquiring companies, according to Dealogic, in deals ranging from Heathrow airport to Cirque du Soleil. 

Column chart of Value of co-investments and direct investments by pension funds ($bn) showing Canadian pension plans have pioneered direct investment trend

The Australian pension industry managed A$3.1tn ($2.3tn) at the end of the first quarter, according to the Australian Prudential Regulation Authority, and inflows are set to grow faster when Australian employers’ mandated contribution rate rises from 9.5 per cent to 12 per cent by 2025.

Funds that have recently brought private equity teams in-house include Aware Super — the A$135bn super entity formed through the merger of First State Super and VicSuper in July 2020 and then by absorbing WA Super in December — and Australian Super, the country’s largest super fund with A$180bn under management.

Aware has partnered with private equity firm MIRA for a A$4.6bn bid on Vocus, a Sydney-based telecommunications group, while AusSuper has teamed with Melbourne-based BGH Capital to bid for Virgin Australia.

Robert Credaro, Aware Super’s head of growth assets, said that its investment programme would remain mainly built around a small number of close private equity relationships both in Australia and globally, but that it would continue to expand its direct investment capability.

Bar chart of allocations as of end-March 2021 (%) showing Australia's 'supers' are big in stocks but bulking up private assets

But analysts say there are limits to how much the pension funds can go it alone. Even direct investments were often in partnership with a private equity firm that still handles most of the operational aspects, said Mark Wiseman, the chair of the Alberta Investment Management Corporation.

“If I’m [private equity investors] Steve Schwarzman or Henry Kravis, I’m not all that worried about these funds competing with me. They’re clients, not competitors,” he said. “Pension plans are good at allocating capital but not at operating businesses.”

Martin Fahy, chief executive of the Association of Superannuation Funds of Australia, said: “Superannuation funds are acutely aware of the complementary role which the very largest asset managers play and the benefits from partnering with pension fund peers in other jurisdictions when competing for scarce quality investment opportunities.”

However, in some steady, uncomplicated sectors — such as toll roads, airports and property — pension plans are increasingly comfortable operating alone. On domestic deals, the bigger Australian funds were more likely to start sidestepping Wall Street entirely in the future, said Michalakis.

“We’re seeing more co-investments now, and then we’ll see more complete disintermediation further down the track,” he said. “The Aussie supers are going to double in size over the next seven to 10 years, and going to have to become major players, both offshore and onshore.”



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