The audience was aghast. This was not what they had come to hear. David Brown, chairman of the Australian Private Equity and Venture Capital Association, was momentarily befuddled.

It was after all a conference for Australia’s most prominent private equity firms organised by the Asian Venture Capital Journal. To question the industry in such a setting seemed like heresy.

Yet a $19 billion superannuation fund and a prominent consultant were calling into question the transparency, returns and costs of investing in private equity.

Corrin Collocott, portfolio manager at Sunsuper, says private equity delivered just a 1 per cent return to the fund last year. That was simply not good enough, he says.

Graeme Miller, head of investment at Towers Watson in Australia, says many superannuation funds were not bothering to invest in private equity.

“Put yourself in the shoes of the funds,” says Miller to an audience of shocked private equity general partners and their salesmen. “They are running financial services businesses that have daily liquidity requirements, daily unit pricing and are highly cognitive of fees.”

“But it produces the best returns,” protested Brown, former head of private markets at Victorian Funds Management Corporation.

Private equity is an illiquid investment. Miller says is not suited to the superannuation business model.

“Trustees build investment portfolios within the system, knowing that at any time a member can ask for their balance,” he says. Moreover, “costs of investing in private equity are high”.

Moreover, Miller says, about 20 per cent of a superannuation fund’s fee budget is spent on analysing private equity funds that comprise on average 3 per cent of their investments.

Collocott says superannuation funds have been burned by the private equity investments made around the height of the buyout boom between 2003 and 2007.

“Such investments are clogging up portfolios and taking up management time,” he says.

Miller says private equity’s reluctance to change its fee structure and its internal organisation was hurting it.

“If private equity funds were structured more like real estate funds with regard to their fees, liquidity and transparency, they may find it easier to attract money,” he says.

Brown simply reiterated that private equity produced the best returns.

“I don’t think we should accept the statement that private equity produces the best returns,” says Collocott.

He says Sunsuper had to do its own extensive analysis and travel around the world to select the private equity it would ultimately invest in.

“We weren’t very successful sitting on our bums waiting for people to tell us they were the best,” says Collocott.

General partners, he reckons, have an attitude problem.

“They’re unfriendly when capital is plentiful,” he says. “They don’t make returns available. Their complex structures make it difficult to find their real returns. Why is it so difficult to prove that returns are better than all asset classes?”