The $1 trillion industry superannuation sector is pitching the benefits of its strong exposure to unlisted assets, amid questions over super fund valuations of private assets in fluctuating markets.
In a new report out this week, industry super lobby group Industry Super Australia argues that the “unique exposure” to unlisted assets by industry super funds in sectors such as property, airports, agriculture and manufacturing, could lead to members having an extra $130,000 in extra savings at retirement.
“Industry super fund investments in local unlisted assets don’t just deliver a more financially secure life in retirement for members, they are increasingly linked to the future health of our economy,” Industry Super Australia chief executive Bernie Dean said.
“By investing in things like nursing homes, allied health providers, renewable energy, airports, emerging manufacturers, ports and toll roads, these funds are growing nest eggs and generating economic growth at the same time,” he said.
The report says industry super funds have some $100 billion of their $500 billion investments in Australia in unlisted assets.
It argues that they “not only provide excellent investment returns to members, but they also create jobs, increase productivity and fuel economic growth.” The higher exposure of industry funds to unlisted assets than retail funds means that a 40 year old member would have $11,000 more over the past ten years which could mean an extra $137,000 at retirement.
The report details a range of unlisted investments held by industry super funds from renewable energy, to start ups, to investments in manufacturing and debt finance for companies.
The report is another move by the industry super sector to market its stronger and distinctive investment performance over the retail sector.
Statistics just released by APRA show the assets of industry super funds have risen to just over $1 trillion while the assets of the retail super sector have fallen to $638 billion as of June this year.
“Industry funds’ distinctive investment approach strengthens Australia’s economy while delivering benefits for members,” the report says.
Industry funds argue that their higher stakes in unlisted assets have been one of the factors driving their higher investment returns over those of retail super funds.
Hard to value
Critics argue that it is hard to assess the true market valuation of unlisted assets while listed assets reflected more accurate market valuations, saying it is difficult for external parties to assess the valuations and question how rapidly they may be downgraded in a down market.
However the industry funds say their unlisted assets are subject to rigorous valuation processes.
The issue was raised recently by Morningstar’s Annika Bradley in an article asking: “Can you trust industry super fund valuations?”
“The financial year end performance data has been met with suspicion from investors, advisers and even between super funds,” she wrote.
She noted that statistics prepared by the Association of Superannuation Funds of Australia show that the average My Super product holds over 20 per cent of assets in unlisted property, infrastructure and private equity. The bulk of the industry super funds sector is concentrated on providing MySuper products. “Given the inflow profile and investment time horizon of some super funds, these large allocations to illiquid assets have remained manageable,” she wrote.
However a recent review by APRA highlighted “ the need for considerable improvement in industry approaches to valuations and the need to conduct valuations proactively and proactively and regularly”.
The sector is awaiting APRA’s update of its updated guidance on valuations which Bradley says “can’t come soon enough”.
But as their latest paper shows, the industry funds argue that their considerable investment in unlisted assets has not only been a positive for their members but has benefitted the Australian economy across a broad range of areas.
It argues that industry funds have invested in a suite of start ups such as online design company Canva and are becoming increasing investors in renewable energy projects including solar and wind power.
Industry funds have more than $3.3 billion invested in Australian agriculture with industry fund investment vehicle IFM providing more than $100 million for financing livestock for Australian farmers.
The report argues that industry super funds are also playing a role in helping to back Australian companies with equity capital.
The largest industry fund Australian Super has some $60 billion invested in the Australian share market. Since 2013, it has participated in 271 capital raisings providing more than $5.3 billion in new capital for Australian companies.
The fund has provided another $3.5 billion in sub underwriting commitments across 65 transactions since 2013.
The report says industry super funds are keen to further participate in nation building projects in the Australian economy if they can get more consistency of government policy, particularly in areas such as renewable energy and social housing.
It comes as Federal Treasurer Jim Chalmers said the Government was also looking for the superannuation sector to back national building projects in housing and clean energy.
But while this is in line with the argument being put by industry super funds, he did not provide any specifics on how super fund capital could be drawn into more mega projects.
While super funds have said they are keen to look at more mega projects in Australia, including those around infrastructure, they are also under pressure to deliver financial benefits to members. However the strong capital inflows which are continuing to go into industry funds in particular highlight its capacity to invest in more unlisted assets.
The pressure is on the big super funds in particular to find new avenues of investment, which these days are increasingly found offshore.
AustralianSuper chief executive Paul Schroder told Reuters recently the fund is expecting to see inflows of $40 billion this year and strong capital inflows into meant it “had the ability to extract an illiquidity premium” for investing in unlisted assets.
He said unlisted assets were “well matched to the liabilities of pension funds” and AustralianSuper had “really robust methods and processes” for making sure that its unlisted assets were properly valued including using independent valuers and having an internal valuation committee.