Dan Farmer, the chief investment officer of Insignia Financial’s superannuation and investments business, says the perception that retail funds are reluctant to invest in unlisted real assets was “probably true five or ten years ago”.
But these days, Farmer says the super funds he oversees are starting to be comparable to industry super funds in terms of the percentage allocation to unlisted assets.
“When we acquired the ANZ SmartChoice Fund business… it was pure listed assets,” Farmer tells Investment Magazine.
“Over the last two or three years, similarly to what we’ve done with MLC and IOOF super funds, we’ve been growing the allocation to those unlisted assets.”
Insignia has $180 billion of super assets under management (AUM) at the end of last financial year, according to The Conexus Institute* analysis of annual APRA data, which makes it the biggest retail fund and the third biggest fund in the country.
Farmer serves as CIO of the newly branded MLC Asset Management investments and super business and oversees the bulk of APRA-regulated money across the various retail super funds owned by ASX-listed Insignia.
Under its former CEO Renato Mota, Insignia had occasionally been a critic of big industry funds in recent years, accusing them of taking their members for granted by making big allocations to unlisted assets on the assumption that few will redeem their retirement savings and switch funds.
But while it is increasing its exposure to and appetite for unlisted assets, Farmer says prudent liquidity management is always front of mind.
“We’ve got the skill set and the governance structures in place to really manage those unlisted assets properly,” he says.
He also says Insignia’s focus within private markets differs from many industry funds in that it does not covet “trophy assets” like airports, ports and toll roads that profit-for-member funds are particularly fond of and have often said were a factor in their relative outperformance.
Instead, Farmer says Insignia prefers mid-market assets such as telco towers and fibre networks.
“It’s still a competitive market, but not necessarily as much as the headline unlisted infrastructure assets,” he says.
While his teams hunt for attractive unlisted deals, Farmer says they know better than simply mimicking the same strategy as industry funds.
While some industry funds have access to related party investment vehicles like IFM Investors to gain infrastructure exposure, he says Insignia usually seeks to leverage its asset managers’ weight in the market and creates some competitive advantages for itself.
“One of the benefits of our larger scale is the ability to build out our co-investment capability,” he says.
“We obviously don’t want to overpay for assets so we’re very selective… If we’re uncomfortable with the price, we won’t participate in the co-investment.”
Esoteric credit starved
Insignia is also in the process of increasing credit allocations across the board, and Farmer says he’s particularly keen to put his team’s expertise on esoteric credit to good use.
“We think the returns there are particularly attractive at the moment.
“Capital availability has been tighter to private credit in general with the traditional banking sector pulling back. The more esoteric specialty finance area has probably even had greater capital starvation.”
He says esoteric is treated as a strong diversifier in the portfolio because it is less influenced by the macroeconomic environment, as it is less dictated by, for example, the earnings of a business or real estate assets and backed by other collaterals.
The opportunities in this class include legal finance, accounts receivables financing and natural catastrophe reinsurance.
“Depending on the risk profile, we’re looking at low to mid double-digit returns with a variety of risks underneath, but typically those risks are far less correlated to other asset classes,” he says.
Insignia is lucky to have professionals experienced in this niche part of private credit since it’s been running esoteric credit for close to 15 years now, Farmer says.
“Obviously a lot of capital has gone into the traditional private credit markets and we’re being a part of that,” he says.
“But the specialty finance area is being a little bit overlooked, we think.
“In terms of how long that window [with less competition] is open, we think will be open for quite a while.”
*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, the publisher of Investment Magazine.
