Australia aged 65 years or more is projected to increase from 12.9 per cent in 2004 to 26.9 per cent in 2050, after taking into account the arrival of 100,000 immigrants each year. The next immediate liquidity event expected to affect many Australian super funds, however, is a spate of capital calls from alternatives managers wanting to draw-down commitments.

This has already heavily impacted

US pension and endowment funds. The consequences for these investors have been forced drifts from strategic investment targets as they search portfolios for liquidity to meet their obligations. Some have even incurred penalty fees as they redeem investments from hedge funds that have imposed gating provisions, Dallas of

Cambridge Associates says. Super funds with substantial illiquid investment programs, particularly in private equity, are expected to face a somewhat similar increase in capital calls.

King of Sovereign Investment Research questions whether funds with alternatives programs have accurately projected what their illiquidity exposures will be in years to come. QIC’s Rieck believes these programs will “act like a thirsty sponge and drain liquidity from portfolios” in the next two years, rather than the typical timeframe of five years, as managers see attractive buying opportunities in the unlisted universe, since valuations of such assets are expected to decline. “It’s not clear where funds are going to get money from,” Rieck says. “We’ve seen funds with large outstanding commitments, and managers are calling for capital.

They think they’ve found that once-in-a-lifetime asset. And funds have to provide – it’s a contractual commitment.” To some, however, the threat is overblown. Neither ARIA nor any clients of Frontier Investment Consulting have reported unusually sudden calls from unlisted asset managers for committed capital. Crafter of ARIA says one distressed debt manager has drawn down its commitment faster than usual, but that private equity managers have been quiet. In the private equity market, deal-flow has slowed because credit remains expensive, and calls for capital from these managers has not been identified as a risk in ARIA’s cashflow forecasts.

The multi-manager business of Colonial

First State (CFS) can discard this scenario. It does not run any illiquid investment programs – not because it is sceptical of the return or diversification benefits, but to ensure it can accommodate member choice. “You can’t lock yourself into long-term illiquid timeframes when underlying investors can withdraw their cash,” says Scott Tully, head of First Choice Investments at CFS.