BlueNotes debate: super innovation in superannuation

In a roundtable in conjunction with PwC, BlueNotes managing editor Andrew Cornell discussed the issue with CFA Society of Melbourne past president Paula Allen, Managing Director at OurCrowd Australasia Dan Bennett, Executive Chairman of Good Super Aron D'Souza and PwC Managing Partner Chris Dodd.

"The minimum viable size for a VC fund is probably a billion dollars and no one has ever raised a fund of that magnitude in this country. "
Aron D'Souza, Executive Chairman of Good SuperIn this, the first of a two-part series, we began by asking what is currently stopping the superannuation system playing a greater role in funding and supporting innovative investment.

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Paula Allen: Australia historically has a problem with risk and investment in change. Part of it has been experience – the results haven't always been good. Some funds have tried to do it themselves and perhaps learnt venture capital isn't really their area of expertise.

The other thing is how we've structured super in this country – it isn't optimal. We assume people work permanently for 30 years yet we keep having debates about how we can casualise the workforce.

If you look at how we structure super and tax we actually assume you are working permanently and say you have to invest for 30 years. Yet any one of us can walk into our fund this afternoon and say I want to transfer all of my funds immediately.

It's a bit disappointing but our discussions around this haven't really gone back to those fundamental anchor points.

Aron D'Souza: There are deep, structural flaws in the design of the superannuation system.

The 'stronger super' reforms created the three-day liquidity rule, which is where a member can come to a super fund and request to move all of their money into another fund. The rule is ridiculous and runs counter to the desired outcome of long-term investment.

Yale chief investment officer David Swensen, the most successful asset allocator in history and the manager of the Yale University Endowment fund has written two books on this topic.

Our super funds' massive overexposure to public equity means paying a massive liquidity premium which is actually reducing the overall rate of return. It means there isn't enough allocation into good asset classes across the board.

The answer can be as simple as changing the time frames so if you want to change a fund you have to give 12 months' notice.

Liquidity in superannuation is very different than liquidity in banking. In a downward economic cycle you need liquidity to access your cash so people can pay their bills. In a superannuation context, you don't need it because it's designed for people's retirement.

PA: The other thing about super reform is the very strong focus on weekly reporting. Every fund publishes a list each week about the best-performing funds but the fact is we should not be focusing managers on weekly recurrence.

Chris Dodd: There is the opportunity for the growth in self-managed funds to create a level of new bullishness (in terms of allocation) we may not have had before. Although from what I've seen 80 to 90 per cent follow exactly the same strategy as any other large fund.

It's an interesting opportunity for product innovation. How can you change the risk profile for a retiree so they take a smaller portion of the investment and access a cash annuity return, whereas someone else with a different risk profile takes the risk behind the scenes and invests in a larger portion with a long-term horizon?

Dan Bennett: We are starting to have some really interesting, deeper discussions with super funds about their contribution to Australian VCs, which is really exciting and a step in the right direction.

We are really looking to make VC investment a relevant part of their mix but not myopically focused on Australian deal flow. Super funds wouldn't want to be concentrating all their VC exposure into Australia. It's good to have a global mix.

As Paula says, it's all about picking a number, whether it's $A5 million or $10 million and the bite size they would like to allocate into each deal. Of course there is customer choice too - they can pick what they like or can go agnostic and ask to invest in everything, like half a million dollars into the next thirty deals.

So there's one solution to the selection and portfolio challenges. But I think part of the problem is if we want to unleash superannuation we have had this massive fee pressure on superannuation over the last two decades.

AD: But then the problem is VC is the most expensive asset class to run. So the average venture fund in the US charges 2 per cent plus 20 per cent upside; no one wants to pay that much for superannuation because it comes out of the kind of headline fees members pay.

It's not economically sustainable for a fund to pay such large fees when they could go into another asset class with much lower fees.

Aussie VC funds are all too small. You might say there are all these great guys raising $A200 million dollar funds but that's far too small by global standards and if you are running a $A200 million fund on a 2/20 fee structure you have $A4 million a year in operating costs.

You can't really do due diligence on that budget and you can't employ a big enough team. The minimum viable size for a VC fund is probably a billion dollars and no one has ever raised a fund of that magnitude in this country.

DB: Even then if you are going to raise a billion dollar fund the super funds are going to squeeze you for a much lower fee structure. So on the VC side you won't have the resources to properly take all the activities necessary to run a good fund.

CD: I want something like an audacious dream of what the allocation of Australia's super funds could look like in 10 or 20 years' time. What is our national versus international spread? What's the level of liquidity needed?

Let's just get thinking of a blueprint or a national benchmark because as time passes more and more is getting kicked into the bowl but every decision is basically made at such a micro level it doesn't really allow a good decision at a holistic level.

PA: If we look at what is doable it really plays to highlighting the hero stories in the media. If you want success in this market it's good to get the stories out in the public arena about super funds putting away amounts of money in VC and PE.

Now we all know those amounts aren't honestly going to be sufficiently significant but they play well in the media, which will breed more success and will mean more people tipping money in.

This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The views expressed in this document are the views of the individual author and are not to be seen as the views of PwC.