Superannuation and startups: Australia’s hidden $2 trillion fund

Local startups have complained that there’s a lack of money available to fund growth in Australia, but behind the scenes is a $2 trillion pool of money that’s barely been touched.

Despite Australia’s “financial market development” ranking sixth in the world, it ranks 44th in the world for venture capital (VC) funding availability – and companies such as Atlassian and Canva have had to rely on US sources for funding.

The superannuation system has $2 trillion in funds under management, but an increasingly small amount is making its way into the VC system in Australia.

Could unlocking superannuation be the key to turbo-boosting the startup sector?

How super invests into the innovation sector

Superannuation already invests in the startup sector, but the amount it’s tipping in has declined even though the amount of money superannuation funds has to invest has gone up.

According to the Australia Bureau of Statistics, the amount of money coming from ‘Resident Pension Funds’ into VC and PE was $10.4 billion in 2010, and decreased nearly 20 percent to $8.4 billion in 2015.

This is despite the overall pie of superannuation growing to $2 trillion in that time.

Of that cash the majority is dedicated to private equity (PE) which tends to invest in more established companies.

PE is crucial to the startup sector. The latest Startup Muster report indicates that 32.6 percent of Australian startups in 2016 received some form of PE funding.

That percentage is expected to grow in the coming years.

Currently, investment in VC and PE fits into what superannuation funds call an ‘alternative asset’ class.

When a superannuation fund receives your money, it invests it in a range of financial products. The most popular are stocks such as BHP and the big four banks, and term deposits.

Currently, the amount of money being invested into alternative asset classes is small. The amount that’s being invested into VC and PE is smaller still.

Some say this is because of regulation.

The flip-side of regulation

While superannuation funds have flexibility around where they can invest to generate a return, some regulations have had a flow-on effect to the way they invest.

The introduction of MySuper in 2014 is one example of this.

MySuper was created by the government to be the default fund for people who don’t check in on their super (read: most people).

Its low management fee and lower risk portfolio means that people don’t find a whole chunk of their superannuation has been eaten by fund managers.

Advocates for getting more superannuation cash into VC and PE say that this discourages investment in assets which have higher management fees – such as VC and PE.

On the flip-side, however, VC and PE can offer greater net returns.

While it’s estimated that only 10 to 20 percent of PE and VC investment succeeds, they succeed big, up to 10 times the initial investment.

It’s an entirely different kind of investment than the government has in mind for people’s retirement savings, and advocates say that regulation has played a role in super funds focusing on fees rather than net return.

Fees vs net return

Investment in PE and VC requires a lot of management, and the amount of management goes up the more funds you invest in.

So investment in 20 funds at $5 million each means more management than an investment in one fund at $100 million.

The same amount of money is invested, but the amount of management goes up significantly.

More management means more management fees – which are ultimately passed onto the superannuation holder.

But there are some that don’t buy that narrative.

“Over the past decade or more we have gradually moved towards a significant fixation on pushing superannuation funds to reduce the fees charged to members,” Australian Private Equity and Venture Capital Association Chief Executive Yasser Al-Ansary told The Pulse.

“Collectively, funds have to maintain a day-to-day focus on reducing their fees, even if ultimately this constrains the ability for superannuation funds to deliver great returns for their members.”

He said a range of policy decisions have made super funds look at their fees rather than net return, meaning PE and VC funds are at a disadvantage.

Al-Ansary also noted that there was a lack of Australian VC and PE funds to take on huge investments, as the amount of funding super could provide outweighed what startups need.

“There are several very large superannuation funds that are quite open about the fact that the smallest investment mandate they can hand out is $100 million,” said Al-Ansary.

“In some cases, you have VC or PE funds that simply can’t take that amount of capital from one single institutional investor as part of a pooled investment structure.”

Is it fees, regulation, or simply a lack of deals that makes investment from superannuation funds problematic? For more, see Superannuation and startups: Funding Australian innovation.