As our economy continues its transition towards being a more knowledge-based high value-add marketplace, it is very important that the super system – a pool of capital larger than Australia’s entire annual GDP – continues to support new investment into the beating heart of our economy, Australian businesses.
Australia’s $30 billion private capital industry is behind the startup, growth and expansion of thousands of Australian businesses of all types and sizes, across almost all industries, every year. It’s perhaps the only industry that can lay claim to creating new industries for the future, every single day.
Over the next decade, funding channels such as private equity, venture and private credit will continue to see growth in both demand and supply as more privately-owned businesses seek access to capital and strategic value-add, in preference to other more traditional forms of funding such as listed markets.
Globally, private capital fundraising has broken new records over the past few years, and here in Australia, our data tells us that there’s been an 18 per cent increase in assets under management in the period from December 2017 to June 2018 alone – greater than any annual change seen since 2011.
The most recent data also tells us that there is around $11 billion of ‘dry powder’ ready to be invested by private capital funds, which is a good proxy for the likely flow of new funding into Australian businesses over the next 12 to 24 months. That amount of capital available to be deployed in the short-term is a big positive for Australian businesses.
Superannuation and pension funds play a vitally important role in providing institutional-level funding for private capital investment firms. Over recent years, almost 90 per cent of the Australian industry’s total new fundraising commitments have originated from Australian or offshore-based superannuation and pension funds.
Domestically, policy and regulatory changes over the past 15 years in the super system have continued to place a heightened focus on highly liquid, low-cost investment strategies within default products. But evidence is mounting that some of the changes over recent years have not so far delivered the better outcomes that were promised for fund members.
Since the introduction of MySuper, default products have continued to be typified by large allocations to passive assets such as listed equities and fixed interest. The challenge that policy makers and regulators seem to be ignoring though is that this strategy is not aligned with the experience in most other developed markets around the world, where pension funds are much more focused on allocating larger portions of their portfolio towards long-term and illiquid growth assets which underpin the long-term accretion in pension savings for fund members.
If the starting point here is to ensure that the super system plays a significant role in both boosting retirement savings and simultaneously easing long-term dependency on social security through the age pension, we must recognise there are fundamental flaws in the design of key policies and regulations that continue to drive momentum in the opposite direction.
Australian super funds have, on-average, a lower exposure to private capital investment strategies than is the case in other jurisdictions. A simple analysis of average allocations to private capital – private equity, venture and private credit – as between the United States, Canada and Australia shows this clearly. Canada has allocated 12.5 per cent to private capital, US public pension funds 8.6 per cent and Australia at 4.2 per cent. The global average target allocation is 9.9 per cent.
When you look at the mega trends that can observed around the shift away from public listing towards remaining privately held, some important questions arise about what the future may hold for public markets and the constant supply of new initial public offerings that most markets rely upon for growth and value accretion.
If new economy businesses choose to stay private rather than list – or choose to stay private for much longer before listing – there will undoubtedly be a profound impact on public markets in the future.
What we know right now, though, is that private markets are increasingly driving the transition of our economy, and along the way countless world-class Australian businesses are growing and expanding to become influential global players in their sectors. If you’re an institutional investor and you’re not looking closely at this structural change taking place within our economy, you might be missing something. Not only that, you’re probably also missing out on the consistent and significant out-performance that comes with investing into private markets.