As the Australian superannuation industry grows past the $3.5 trillion mark and pushes inexorably towards $4 trillion and beyond, super funds are inevitably finding themselves as major players in public investment markets.
The Fiduciary Investors Symposium in Healesville, Victoria, last month heard that on one analysis Australian superannuation funds account for 21 per cent of Australian listed equities, and 26 per cent of Australian fixed income securities.
Given they’re becoming such large fish in small ponds, it’s natural that funds have turned their attention elsewhere, principally overseas, where they’re far smaller players in far larger capital pools, and, increasingly, to unlisted assets.
But funds are also being driven to consider unlisted assets by regulatory developments, particularly the Your Future Your Super performance test.
YFYS pressure looms
Mine Super chief investment officer Seamus Collins said that for his fund, YFYS was “a very live issue”.
“In 2021, we finished six basis points above the death zone,” Collins said.
“I think we only got about out of the death zone in about mid-June of that year, by our internal calculation. Benchmark risk was a substantial factor, so that is a base-case of making sure the fund continues to move further away, which it has, I’m pleased to say.”
Collins said the fund’s approach to investing in unlisted assets is fundamentally dictated by its membership characteristics.
“We are very narrowly exposed to the one industry, the east-coast coal mining industry, so we have very little sector diversification in our membership,” he said.
“We have flat to very slightly negative cash flows. But the good thing is the cash flows are very, very stable over time. So we might have flat to minus 1 per cent, and there’s no real volatility in those cash flows.
“But it does give you a very different situation for someone like me looking at private [assets] than [Hostplus chief investment officer] Sam [Sicilia], who just turns the firehose of new money, and points it at his latest private market thing. He’s a true capital allocator. Someone like me and my fund, I would more characterise ourselves as capital recyclers. And we have to be very conscious of how we do it and what sectors we have.”
Collins said the fund had “a small footprint” in private equity, and “more moved into private credit – four to seven-year capital recycling, deep relationships with a relatively small number of partners”.
“Private credit is an area rather than private equity that we have gone in because of the capital recycling,” he said.
“The quicker turnaround in distributions and money being returned, the opportunities we’re seeing, predominantly in Europe and the partners we could use to execute on that strategy.”
Collins says Mine Super has been less enamoured of property, where “we’ve been slowly pulling money out…in available liquidity windows”.
“I expect to still have those redemptions going when I’m retired, or even when I’m dead,” he said.
“And the flipside of that has been more conviction in infrastructure. And again, that’s with good partners. From a liquidity point of view, a balance between Australia and overseas premium assets like international airports, Australian international airports.”
QIC head of mid-risk strategy Haresh Sampat said his organisation also saw itself at the capital-recycling end of the spectrum.
“The largest pot of money that we manage is a closed-end defined-benefit pension fund, which pays out pays out benefits,” Sampat said.
“We have certainly bought into the private credit story. Our portfolio does have the luxury of not having to follow the [YFYS] test and hence is able to look for the best risk-adjusted returns, rather than considering solely on fees.
“We have been able to do explore opportunities there in the private credit side and really, that’s been really the focus for last two, three years has been building out that portfolio, starting off at the direct lending side.
“But we’re looking really looking at opportunities, [in] a bit of a contrarian play, looking at things like real estate credit where markets are obviously a bit dislocated – could we provide liquidity there and get those returns?”
While both Collins and Sampat said their funds had been wary of private equity, Neuberger Berman head of capital solutions David Lyon said the asset class is cyclical and even though “everyone has called for the death of private equity so many times, it’s still not dead”.
“What I will tell you is that deals that were done in late ’20, and ’21, they’re going to struggle, some might use the term suck,” Lyon said.
“But when you pay a very high multiple – 17, 18 times – and when rates are zero, it’s very easy to do M&A. The whole thing was, I’m going to pay a big multiple for platform and I’ll do a creative M&A very rapidly. And because the loan market’s a private market, there’s no regulation about the definition of EBITDA. It’s certainly not constructed as per GAAP principles.”
Lyon also said he didn’t buy the idea there’s a wall of maturities looming that will trash private debt markets.
“Companies don’t all wait for like the last hour, like oh…that thing’s due?” he said.
“People, when they can do it along over time, are opportunistic. They go to the markets and see. And the best companies tend to defuse that obligation more quickly.
“I generally don’t like that there’s some theoretical notion of  and the first wall starts; generally even in this market things are refinancable, and you eventually bite the bullet if you’re not going to risk financial distress and say I’m going to wait until the last possible minute.
“Even in the GFC world…that never came to pass because the markets are too rational for that.”