Australia Week: ‘Domestic VC funds are outperforming Silicon Valley’

Sam Sicilia, chief investment officer of the A$33bn superannuation fund Hostplus, talks about its venture capital portfolio and supporting local innovation.

Sam Sicilia

Why are superfunds increasing their investments in Australian VC managers?
Superannuation funds collectively own about 25 percent of the Australian public equities market. We are increasingly becoming the market, which is why we need to invest in other ways to avoid bidding up asset prices. Hostplus has always been prepared to be different and invest in alternative sectors. This has resulted in us gaining exposure to attractive investments, which we otherwise could not have gained through traditional asset classes.

Investing in Australian innovations, such as Aravax (a peanut allergy vaccine), Cardiac Dimensions (a heart failure device) and Canva (a graphic design website) has given us exposure to exciting new businesses, rather than passively waiting for them to disrupt other more established companies. These alternative investments also play an integral diversification role in our balanced portfolio.

Has anything changed domestically that has supported this?
Australian VC has matured enormously over the last few years and many of the previous impediments, such as the tyranny of distance and the cost of getting a start-up off the ground have reduced significantly. We have domestic VC funds which are outperforming their Silicon Valley counterparts. Australian entrepreneurs are also thinking differently, considering the global potential of their start-up from day one.

This is coupled with the fact that venture-backed companies are staying private longer, and young companies are growing faster because technology is enabling rapid scalability. Venture-backed companies are therefore bigger and older by the time they are open to public market investors, meaning there are greater opportunities for long-term investment and strong net returns in this asset class.

What’s attractive about Australian VC?
The Australian VC market is typically less competitive and offers friendlier investor terms. As a long-term limited partner, Hostplus looks to develop strong track records with our Australian VC partners.

By partnering with and bringing in the expertise of Australian fund managers, such as Brandon Capital, Square Peg Capital and MH Carnegie over the long term, we can better understand the likely future trajectories of Australian listed markets, especially the industries within those markets.

As a national industry superannuation fund, we also maintain a conscious bias towards investing in our home country. We are passionate about supporting local innovation, attracting and retaining top talent in Australia. This includes showcasing Australia as a world leader in health and medical research.

How much of Hostplus’s VC portfolio is in Australia vs US or other markets?
Hostplus is one of Australia’s largest institutional investors in venture capital, with more than A$700 million ($516 million; €445 million) committed to the start-up ecosystem, supporting innovation in biomed, fintech, clean energy, autonomous cars and cybersecurity.
Over 20 percent of Hostplus’s VC allocation is invested in Australia, around 40 percent in the United States, as well as smaller allocations in China, the United Kingdom and France, among others.

Any concerns investing in VC?
VC returns can be significant as the risks involved are higher than other, more traditional asset classes – such as infrastructure or property. It is therefore imperative that higher valuations are justified with increased levels of growth, downside protection and quality investments.

We use two strategies to mitigate the risks associated with investing in venture capital. Firstly, we reduce the size of our VC investments relative to the typical private equity investments we make. Secondly, we use diversification to spread our investment risk across different managers, sectors, company lifecycles and, most importantly, sources of potential dealflow.

What are the expected returns for your VC investments?
Whilst it isn’t possible to model expected returns for all VC investments, as a rule of thumb, VC fund managers target a return of around 20 percent or more. However, this varies between investments and is determined by several different factors. For us, we always aim high, otherwise it’s not worth it.

Sam Sicilia joined Hostplus in 2008 as chief investment officer. His career history includes director of investment consulting with Russell Investments, senior manager at Bank of Ireland Asset Management and senior asset consultant with Towers Perrin.