Fintech venture capital is being used by First State Super to manage risk towards its large exposure to traditional financial services.
Australian superannuation has a significant concentration to financial services through its exposure to big banks and other financial institutions – an area that is a likely target for disruptive business models given the size and margins in that space.
“Having a small exposure that gives you a seat at the table where the disruption is coming from seems prudent,” said Richard Brandweiner, chief investment officer of First State Super.
The decision to invest in FinTech venture capital is also prompted by the $52 billion fund having become increasingly aware of its position as a universal owner, recognising that because of its size the investment choices it makes in one area can affect the wider economy and markets, leading to flow-on impacts on other parts of its portfolio.
On Tuesday the fund announced that it was investing around $250 million in technology innovation through a partnership with H2 Ventures, a fintech venture capital company based in Sydney.
Brandweiner said an investment into Blackbird, another technology venture capital firm, earlier in the year was a good example of the model they will use.
“There are actually two investments in there. There’s a small amount in early stage seed funding and then the bulk of the investing is actually for follow-on funding,” he said. “The idea being that the early stage is the highest risk, so we only have a very small allocation of capital towards that.”
He added that the logic behind it was to give access to deal flow (the rate of business proposals/investment).
“In a sense it’s like a filtering process where there’s a small capital allocation to a lot of early-stage ideas, but ultimately there will only be a handful of more developed ideas that come out of that which have a higher probability of success.
“You need to invest in the early stage to generate the deals. The bulk of the risk is taken once there is more certainty and predictability of the outcome.”
Another part of the logic for investing in venture capital is related to the position size in the portfolio. As funds within the system are significantly larger than they were 15 years ago, it has enabled First State Super to allocate what is a very small component of its portfolio, managing risk in that way, while still having a very meaningful impact in Australian venture.
“While we are clearly looking to generate good returns from these types of investments we are also mindful of the flow-on ramifications on enduring innovation and talent in Australia,” Brandweiner said.