Australian MySuper funds allocate 3.4 percent to PE

In Australia, only about 35 percent of MySuper superannuation funds make allocations to private equity, according to research undertaken by Rice Warner in association with the Australian Private Equity and Venture Capital Association (AVCAL).

“Even though private equity consistently delivers returns of about 4 percent (net of fees) above listed markets over the medium to long term, allocations to private equity remain low,” head of policy and research at AVCAL Kar Mei Tang told Private Equity International.

Australian superannuation assets totalled A$2.02 trillion ($1.4 trillion; €1.3 trillion) at the end of the June 2015 and total assets in MySuper products stood at A$428 billion, according to the Association of Superannuation Funds of Australia.

“Those MySuper funds that do invest in private equity and venture capital have an average allocation of 3.4 percent to the sector. The majority of Australian super funds' alternatives or illiquid investments tend to be allocated to infrastructure and property,” she said.

This contrasts with the Future Fund, an independently managed Australian sovereign wealth fund, which allocates 12 percent to private equity, and with pension funds in other markets which tend to invest more in private equity and venture capital, said Tang.

For example, in the UK funds invest about 5 percent of their portfolio in private equity (which is argued to be too low) and the US where pension funds invest around 8 percent, rising up to 12 percent for larger funds, she said.

The low allocation to private equity by MySuper products comes despite evidence from Rice Warner that an allocation to private equity can enhance, within a diversified portfolio, the risk-adjusted long-term retirement outcomes of superannuation members.

The Cambridge Associates and AVCAL index shows that Australian private equity and venture capital continued to deliver strong returns, outperforming the S&P/ASX 300 Index by over 8 percent in the June 2015 quarter and delivering a 23 percent net return for the year to 30 June 2015.

The Rice Warner report shows that the take-up of private equity varies by sector and that industry superannuation funds, which differ from MySuper funds with terms, are the main source of superannuation investment into private equity, with retail funds having less involvement.

In Australia, MySuper accounts were introduced in January 2014 and have lower fees than other super funds that include retail funds, which are run by banks or investment companies, industry funds, public sector funds and corporate funds.

Among industry funds, there is evidence of larger funds being more likely to invest in private equity than smaller funds.

According to Rice Warner, this may reflect larger funds being better able to fund the expertise needed to invest in more complex assets, and the benefits of size in managing the risks of liquidity issues.

The data also suggests that a significant number of funds that are not currently invested in private equity now have sufficient scale to be able to do so.