For a man who has just got his hands on the steering wheel of a $230 billion superannuation behemoth, Ian Patrick is certainly not resting on his financial laurels.
His old employer Sunsuper has just formally merged with the other big Brisbane-based super fund, QSuper.
That emphatically places his new employer as the second biggest super fund in Australia after AustralianSuper, which was has AUM at around $245 billion.
He’s clearly more focussed on bedding down not one super fund merger but two. The big one, very well telegraphed and recently completed, was the creation of a Queensland superannuation giant by merging Sunsuper, his old employer, with the State-Government-based QSuper.
Merger of equals
That went live in March and was in many ways a merger of equals, since Sunsuper has many more members (at 1.4 million compared to 600,000) and QSuper has a bigger pot of funds under management at $130 billion compared with Sunsuper’s $97 billion.
Of that $130 billion he was quick to note that number included around $15 billion which is specifically under the direct instruction of the Queensland Treasury, being dedicated to providing defined benefit pensions to retired public employees.
Meanwhile the merged Sunsuper/QSuper entity, prosaically named the Australian Retirement Trust, is also in the process of taking over the Australia Post Superannuation Scheme (APSS) which has 28,000 members and a total of $8 billion in assets.
That puts the overall ART funds under management pot, once the Post fund is taken on board, at $235 billion.
Management challenges
Has this merger process produced an elephantine operation that will be hard to manage? Ian Patrick said no, particularly as he has his eye on lifting his merged funds’ weighting in unlisted entities, i.e. private equity .
“The opportunities from scale outweigh the disadvantages. That’s on a net-net basis,” he said.
“I’m not worried about our scale. For instance the size we are today should be compared with the scale we could be at in three to five years. That could be up to $400 to $500 billion.
“That’s still a beneficial scale. It is not the type of scale of Norges Bank (the Norwegian Sovereign Wealth Fund) or GPF, a huge Japanese pension fund. They both manage funds in excess of $1.5 trillion and that’s where constraints are much more real.
“Yes, there are some disadvantages to scale and I think those disadvantages can be boiled down to where we become too great a business risk for counterparties,” he said.
Risk for counterparties
In other words, it’s not that ART’s too big, it’s that counterparties such as hired fund managers might consider themselves too reliant on one client.
“So if we want to invest in Australian small caps and we want to employ a high quality external investment manager to work to get the capacity we want to make a difference to the portfolio, we’re probably going to be the dominant if not the very dominant counterparty for that investment manager,” he said.
“So their whole business revolves around our continuing to see them in good favour. Many managers don’t want that singular business risk. And so our ability to get capacity with high quality managers is constrained. I am very confident that the advantages (e.g. deal access, deal terms, control rights, lower external manager fees) outweigh the disadvantages.”
Leverage of scale
Which brings us to how he’s looking forward to using some of the leverage provided by the merged ART entities.
“One is the advantages we have in unlisted assets both to take bigger stakes, which gives us greater control and governance right, which allows extraction of value over time,” he said.
“Also, we can influence the terms of the deal with a counterparty in other ways. If we have that asset managed by Macquarie or Global Infrastructure Partners or one of those managers, we have an ability to influence the terms. But I think scale gives you the opportunity to talk to more counterparties.
“If you’re a medium sized fund, you basically have to work through Macquarie. A bigger fund allows you to talk directly to the likes of Ontario Teachers (Ontario Teachers’ Pension Plan) or PGGM in the Netherlands, or whoever it happens to be, and form consortia that way and I think that’s very positive for real assets.
“And the other advantage is the ability to achieve synergies in things like internal trading.”
He was quick to point out that ART does not manage funds in-house and the only internal trading ART does is using an established QSuper trading desk which manages currency hedging, rebalancing, and other capital market type transactions.
“Those fixed costs will increase somewhat if we were to add Sunsuper’s equivalent activities under its watch, but the per unit cost doesn’t go up nearly as much,” he said. “And you can only really achieve those kinds of efficiencies at some level of scale because of the underlying economy, fixed cost of the trading systems and other things.”
“Those are two examples. I think the other requirements which are provided by scale include an effective means of decision making.
“With scale you can employ a large team, you can get your delegations between the board, the Investment Committee, and the internal teams such that you are able to act in a timely manner when opportunities come around.
“And that is definitely advantageous.”
