“The danger is if your fund doesn’t get access to half a dozen 100:1 winners, [then] you’re in big, big strife because that’s where all of your surplus return comes from.” deaf institutional ears For venture managers aiming to raise capital from superannuation funds, the future is not looking good. Historically the largest investors in Australian innovation, super funds have beat a steady retreat from the sector. In 2010, $168 million was committed to managers, and much of it came from the final round of the Federal Government’s Innovation Investment Fund (IIF) program, according to AVCAL. In an industry where institutional mandates – even for small-cap equity managers – are issued in the tens of millions, this fundraising total speaks volumes. The super funds contacted for this story gave three common reasons for their disinterest in venture: its illiquidity and uncertain payoff; the small size of investments; and its unimpressive track record. One private markets chief, who prefers to remain anonymous, bluntly says: “It’s in the too-hard basket.” Venture’s illiquidity should not be problematic for large funds with many members aged in the twenties and thirties. These members can bear this risk in return for an eventual payoff from venture.

However, as in private equity, these investments should be staggered across vintages to ensure that all members who seed companies experience some benefit. Moreover, the private equity programs run by large super funds, which number in the hundreds of millions, consume more liquidity while mature unlisted infrastructure, another big-ticket item, is also illiquid but often generates a regular income stream. Where they have an advantage over venture is they provide greater certainty of returns: private equity invests in businesses with an established market presence, while returns from infrastructure can be modelled with reasonable accuracy. Looking at the 10 years or more that are often needed to seed, grow and exit a successful business venture, many super funds feel uneasy. They are uncertain if the unproven ideas in a manager’s portfolio – be they in the technology, life science or cleantech fields – can become commercial successes. “It’s hard to put money away and think it’s going to be the cure for cancer,” the private markets chief says. “We’re in a culture in which we want to see money. We want certainty. We want to see revenues being made and we’re not seeing that from venture.” But the funds that see promise in venture, and decide to access the illiquidity premium and growth potential of the asset class, then encounter a different hurdle: their own investment policies. Funds are usually restricted from becoming dominant investors in funds – say, by contributing 10 per cent or more of the capital in an investment vehicle – and thereby taking on concentration risk.

Join the discussion