Numbers might give you some comfort but they don’t tell the whole story, according to CFS. To get that, you have to dig a little deeper – and take a lot of meetings.
The passive giant’s former super boss has found a new home at Bell Asset Management, and comes into the increasingly tough business of active management with his “eyes wide open”.
‘Inhibitors and constraints’: Frontier’s deep dive into nation-building finds steep barriers
While ‘nation-building’ is one of the official policy goals of the Albanese Government, it’s inherited a significant budget deficit at a time when economic growth is slowing globally. To that end, Albanese and Treasurer Jim Chalmers have asked super funds to think about giving them a hand, potentially diverting the proverbial rivers of gold away from growthy private tech companies and into brick and mortar.
Still, the returns must stack up. Industry Super Australia recently tasked Frontier Advisors with answering “three fundamental questions” on private markets investing in Australia. What are the barriers super funds face to investing in Australian private markets? How can those barriers be removed? And what kind of investments would be possible if they were removed?
It will come as no surprise that the two main barriers that Frontier identified in its mammoth research paper were Your Future Your Super (YFYS) and fees.
“Investors might pass the YFYS test and then worry about their level of RG97 fees, because it is quite rigid when it comes to alternative sectors and private markets,” Manish Rastogi, head of real assets at Frontier (photo at top), said in a presentation on Tuesday (November 22).
“The other common factor we uncovered was the policies governing super funds. There’s been a lot of debate in the last two years and it’s created a lot of uncertainty for the super funds, and it would be remiss of me to not mention the energy policy paralysis that we’ve had for the last ten years. That has certainly created some consternation when it comes to investing in renewables.”
Still, there are “idiosyncratic impediments” to investing in some segments of the private markets.
Greater investment in venture capital is constrained by the size of all involved; the industry is too small and super funds too large for them to generate anything close to the returns they’ve gotten used to at the top end of town. Poor past experience has also deterred funds from ploughing member money into venture capital again, and they’re “certainly not coming back in a direct way”. The commercialisation processes for innovations are also unwieldly and complicated.
To fix that, governments could “help improve private capital linkages” with universities. Another solution, which Rastogi said “might sound a bit odd”, is creating debtor-friendly bankruptcies for venture-backed companies to overcome what he describes as the stigma of failure for entrepreneurs. But most importantly, governments need to put in place greater tax incentives or funding mechanisms to assist in commercialising technologies.
“The federal government has just recently announced a $15 billion national reconstruction fund, which is a step in the right direction,” Rastogi said. “That’s a really good way of providing growth capital for innovation with more targeted industries, like medical sciences, renewables, low-emission technologies, defence, and agriculture.”
Agriculture investing – which has found a champion in some funds – also faces “tremendous hurdles”, with a mixed performance track record and its highly fragmented nature making it look subscale even to discerning eyes. Tack on the effects of climate change, commodity price exposure, and reputational issues that can arise and it’s no surprise that agriculture in Australia has only attracted around $3 billion of institutional money. Beyond amendments to YFYS and RG97, Rastogi said that more accurate data was needed for the agriculture value chain and the sector’s performance.
“A performance benchmark for agriculture wouldn’t be a bad idea either,” Rastogi said. “But more importantly for agriculture, the industry needs to invest in people. Just like we have investment professionals for real estate and private equity, when was the last time you came across an investment professional for agriculture… that will go a long way to normalising investments in agriculture.”
But it’s affordable housing – perhaps the pièce de resistance of the government’s nation building goals, given it’s the only real asset to get its own accord – that funds might have the most trouble with. And Frontier’s report could easily become ammunition for those who are against the idea.
“(Affordable housing) has a number of impediments,” Rastogi said. “It’s a very nascent sector, so it needs a lot of transparency and uniformity from all levels of government when it comes to policy settings, whether it’s planning, development pipeline, funding models, or even definitions of who’s a key worker eligible for affordable housing. And we have to accept that it may provide relatively lower returns compared to other traditional asset classes, with potentially high perceived risk.”
Still, investors are “genuinely interested” in helping to address the housing shortfall, Rastogi said, and the issues aren’t insurmountable. Affordable housing investment could be incentivised through programs similar to the Low-Income Housing Tax Credits in the United States, the encouragement of mixed tenure development and cross-subsidies, the development of the broader build-to-rent market, and the use of government land for affordable and social housing – as well as tweaks to YFYS.
“Practically, what the government can do is adjust policy to encourage investment and fix the inconsistencies in the YFYS legislation and RG97,” Rastogi said. “That will go a long way to allow super funds to start allocating fairly to private markets, including to venture capital and agriculture, which we’ve identified are under-invested. Once funds have the freedom they can redesign their portfolio targets and allocations to those sectors without having to keep an eye on whether they’re meeting the test or other legislations.”
