Criticism of Super Funds private/illiquid market investments reveals impatience & short-sightedness

Superannuation’s purpose should be to help all Australians save for their retirement.

The defining advantage of superannuation funds should be that they have patient capital and are investing for 20, 30 and even 40-year time horizons. As a result, they can be the perfect vehicle to monetise the long-term beta returns of traditional asset classes and harvest the illiquidity premium offered by alternative asset classes including infrastructure, private equity, venture capital, private credit, and real estate.

Unfortunately, and despite various efforts (legislating the objectives of the super system was a key recommendation of the 2014 Murray Inquiry and a Superannuation Objective Bill 2016 did not become law), it has been impossible to reach consensus on the definition of superannuation's purpose. Various governments, left and right, and a variety of industry participants, have failed to resolve this problem. Politicians are not aligned with the wider population - senators and members who have served for 12 years receive a pension payable for life.

Superannuation investing is not about instant gratification - it is patient investing for 30+ years. Dipping into that early on decreases your future wealth. Because the issue of superannuation's purpose is unresolved, the most vulnerable are at risk.

The short-sightedness of politicians was on display during COVID. It was those who were suffering financially at that moment who were encouraged to dip into their retirement savings - the better off were much less affected. The Australian Superannuation system should not be an ATM for financial crises. The government, and society more broadly, needs to find a separate vehicle or mechanism to provide financial support for the vulnerable financial crises that beset us.

Conflating the issues of long-term saving and short-term liquidity, inside one vehicle, leads to poor outcomes now and in the future. It is time that this lesson is learnt. Superannuation needs to provide for a dignified retirement, and therefore needs to take advantage of compounding returns over the maximum time possible.

The impatience and short-sightedness, endemic in markets, was once again on display in a series of articles in the AFR relating to superannuation funds and their investments in illiquid and unlisted assets.

A 20 July article, “Canva’s secret value with super funds a test for the regulator”, suggested that “by not accurately reflecting the value of their assets, super funds are facilitating a wealth transfer between members”. These comments are noteworthy as APRA is currently mulling possible changes for robust valuation governance framework.

Valuation accuracy is important, and robust and consistent frameworks are critical. A proper understanding of asset liquidity and the “illusion” of valuation is also important for public and private assets.

If Australian superannuation members are precluded from investing in private asset classes, it will be to their great detriment. Superannuation funds are better placed than nearly any other investors, with perhaps the exception of sovereign funds and university endowments, to reap the rewards of long-term patient investing. Private asset classes including infrastructure, property, real assets, private equity, and venture capital, provide premium returns because many shorter-term investors cannot participate or need early liquidity.

As superannuation members may move their superannuation accounts between managers, there is a need for reliable pricing. Valuation is also a factor when new members join a fund or receive their benefits at retirement. The VC/PE industry has clear and consistent valuation methodology for marking exposures to VC Fund’s underlying startups with external auditors reviewing a funds’ valuations. It is naïve, however, to believe that illiquid assets can be precisely valued on any day, month, or quarter, just as it is naïve to believe that public equity prices represent an accurate price for total liquidation of large positions.

The overall benefits to superannuation fund members of having access to private markets far outweigh the short-term pricing inefficiencies. 30-40 years of compounding interest, strong governance and regulatory oversight and low fees, ensures positive outcomes.

It therefore surprises me that there is consistent criticism of Hostplus and Sam Sicilia. Hostplus has been a long-time advocate and supporter of the local venture capital industry but are primarily champions of their members’ long-term financial interests. Hostplus’s consistent place at the top of the superannuation performance tables may have elicited a case of tall poppy syndrome. Or, perhaps, the politicisation of the super industry is a factor. Whatever the motivation, Hostplus continues to perform exceptionally well in a competitive and challenging environment and members are far better off being able to access the returns of private and unlisted assets.


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