Australian super funds eye direct deals

With Australia’s shrinking GP base and tighter regulation on fees, superannuation funds are increasing exposure to direct deals, according to Willis Towers Watson's director of manager research for Australia.

The Australian superannuation industry is increasingly favouring direct and overseas private equity investments as high valuations and a spotlight on fees become more commonplace in the market, Dania Zinurova, a Sydney-based director of manager research at Willis Towers Watson, told Private Equity International.

“There is a clearer trend now for mid to large-sized super funds to do direct investments or to structure separate mandates instead of going into pooled funds,” Zinurova said. “It started several years ago when some large funds with an established governance decided they are going to build their own internal capabilities and started building their own investment teams.”

“There’s also more open-mindedness about investing overseas and into new areas like illiquid credit, natural resources and other alternative sectors, because more traditional areas within private markets like infrastructure and real estate are getting saturated and valuations are becoming more of a worry for investors,” she added.

Among some notable direct deals in the last year include the A$400 million ($300 million; €280 million) acquisition of North Australian Pastoral Company (NAPCo) by Queensland Investment Corporation, which invests on behalf of super funds, as well as AustralianSuper and IFM Investors’ investment in NSW electricity company Ausgrid in a deal worth some A$16.2 billion.

In addition, the increasing attention on fees and costs of investing for super and industry funds in Australia following the recent MySuper reforms and reporting requirements, have made private equity fund commitments less attractive, according to Zinurova.

Choices are also limited for domestic exposure as Australia’s private equity universe is small with less than 20 firms active – and yet private equity and venture capital have delivered 18.4 percent in 2015 after fees, compared with the S&P/ASX 300 Index of just 2.8 percent over the same 12-month period, according to Cambridge Associates latest performance report.

Super funds assets totalled A$2.3 trillion as of end-March 2017 and are now at an all-time historical record level, according to the Association of Superannuation Funds of Australia. Of that amount, 17 percent or A$16.1 billion is invested in alternative assets such as private equity, property, infrastructure, hedge funds and commodities.