Scrap fee disclosure to boost Aussie PE allocations, government urged

The AIC’s 13 policy proposals to the next government are intended to increase the flow of capital to start-ups, SMEs and other high-growth businesses.

Australia’s private equity and venture capital industry body has called upon the country’s next federal government to scrap fee and cost disclosure regulation for superannuation funds.

The Australian Investment Council is urging the next federal administration to remove regulatory hurdles to greater levels of investment in “value-adding asset classes like private capital”, according to a policy blueprint published last week.

Australia’s Regulatory Guide 97, introduced in 2017, requires superannuation funds to disclose fees and costs paid on investments.

“If you’re commanding a 2 percent management fee on committed capital it can look expensive compared with something like a hedge fund,” James Wood, a senior lawyer in Sydney-based corporate advisory Gilbert & Tobin, told Private Equity International. “It’s unfortunate that the focus has not always been on total returns, net of fees, which is what should really matter as opposed to headline fees charged.”

As a result, some superannuation funds are competing on fees charged to members, and domestic private equity sponsors have sought to diversify their exposure to Australian regulatory changes by looking offshore for capital, Wood added.

Australian superannuation funds have a 4 percent allocation to private equity and venture capital, according to the AIC’s blueprint. This is well below the 16 percent held by Future Fund, Australia’s A$147 billion ($105 billion; €93 billion) sovereign wealth fund, and 8 percent by the US’s 200 largest pension funds.

“Our pension system is weighed down by a heightened focus on costs paid by our pension funds and we feel the time is right now to help transition to there being more emphasis placed on after-fee returns,” AIC chief executive Yasser El-Ansary told PEI. “As an absolute baseline we should strive to be somewhere close to the allocations we see in the US.”

Prime Minister Scott Morrison last week announced a general election for 18 May. The AIC’s recommendation to the next government was one of 13 proposals intended to help increase the flow of capital to start-ups, SMEs and other high-growth businesses.

The blueprint also called for the introduction of a new best-in-practice limited partnership collective investment vehicle by July 2020 to grow domestic and offshore funds available for investment into unlisted assets. The AIC labelled Australia’s existing legal and tax framework for private capital investment as “inconsistent with international best practice”, necessitating duplicate and complex structures and deterring higher levels of foreign investment.

Additional proposals included that the government give renewed consideration to equity co-investment programmes, as well as regulatory changes that unlock private sources of capital, reform equity incentive rules for founders who hold a significant equity stake in their company and launch a regional innovation fund to stimulate the growth of start-ups.

“The unintended effects of certain government policies and regulations that discourage investment into private capital need to be addressed, particularly at a time of slow global growth and Australia’s changing demographics,” the AIC blueprint noted. “Investing in high performing asset classes is the only way that super funds will deliver adequate returns for retiring Australians.”