The Australian Venture Capital and Private Equity Association (AVCAL) is calling on major political parties to remove regulatory impediments to Australian superannuation funds in its latest policy blueprint, “Funding the new economy: a scale-up policy blueprint”.
“We could do a much better job of re-casting our superannuation policy and regulatory framework to drive more meaningful economic outcomes for Australia – the opportunity to unleash the power of superannuation is right in front of us. Super funds are telling us they want to invest more in private equity and venture capital as they see value for members,” AVCAL chief executive Yasser El-Ansary said.
In recent years, some super funds such as VicSuper and UniSuper, the superannuation fund for Australia's university and research sector, have pulled back from private equity investing mainly due to concerns about their members’ reactions to the fee structure.
The Association of Super Funds Australia, an industry association, had also said that the typical fee structure of private equity firms – a 2 percent management fee and up to 20 percent on profits – was “outdated”.
Aside from concerns about the fee structure, scaling down private equity investments has also been a result of changes to super funds’ strategic asset allocation, where real estate and infrastructure are favoured over private equity.
While there are no specific rules restricting superannuation funds from investing in private equity, local regulators have forced them to hold highly liquid portfolios because fund members can change their investment strategy on a daily basis. This means they can switch to another superannuation fund altogether within 30 days. As a result, private equity firms have claimed that pressure for superannuation funds to charge lower fees has affected their ability to raise funds and invest in local enterprises.
Currently, only around 0.5 percent of all superannuation money is invested into Australian private equity and venture capital funds in FY 2015 AVCAL said. This limits the pool of capital made available to Australian business and denies super fund members highly attractive returns generated by the asset class.
Private equity makes up about 10 percent or A$11.5 billion ($8.6 billion; €7.5 billion) of Future Fund’s portfolio, while Queensland Investment Authority has 8 percent of its $74 billion portfolio in private equity, according to PEI Research & Analytics.
As Australia holds national elections on 2 July 2016, AVCAL is also calling for a fast-tracked limited partnership vehicle to encourage foreign investment into high-growth Australian businesses. The current framework, according to El-Ansary, does “not have the right balance between welcoming overseas capital and ensuring Australia’s national interests are protected.”
AVCAL also said the Australian government could do more to boost the local start-up scene and to help scale up home-grown businesses. El-Ansary pointed out that while the National Innovation and Science Agenda (NISA) will be transformative for Australia’s start-up ecosystem, the next phase of innovation, NISA 2.0, must now move to boost the availability of later-stage capital.
Private equity-backed businesses contributed more than 4 per cent per annum to Australia’s gross domestic product and supported more than 500,000 jobs across the economy.
According to data from AVCAL, private equity fundraising almost tripled to A$2.7 billion in FY 2015, compared with the previous year.
Venture capital is playing an increasing role in Australia’s start-up sector. Over A$1 billion is currently being raised by Australian VC funds across life sciences, infocomm and technology and renewable energy.