Ask Hong Kong-based financial bigwigs where they have been jetting off to since the Asian hub lifted its coronavirus restrictions and a surprising number say Melbourne. Sure, mining giant BHP (BHP.AX) has its headquarters in Australia\u2019s second-most populous city, it\u2019s a self-anointed coffee capital and boasts top-notch restaurants. It is also home to some of the country\u2019s largest pension funds. They have plenty of capital to deploy, are too big for their home market and they\u2019re getting larger fast.<\/p>\n
Superannuation, as it\u2019s called Down Under, oversees around A$3.5 trillion ($2.4 trillion) in assets, per regulatory data from the end of March, dwarfing the A$2.5 trillion combined market value of companies listed on the Australian Stock Exchange. It\u2019s one of the top-five pools of retirement savings on the planet, according to OECD data. Not bad for a nation which ranks 55th by population.<\/p>\n
The industry\u2019s total assets are expanding fast: they\u2019re set to almost double to A$6.5 trillion by 2030, according to forecasts collated by the Association of Superannuation Funds of Australia. This will help make the biggest players by assets under management, led by AustralianSuper and Australian Retirement Trust (ART), internationally recognised investment names on a par with California\u2019s CalPERS and the Canada Pension Plan Investment Board.<\/p>\n
The industry owes its rapid growth to a 1992 law that mandated employers set aside 3% of gross pay for virtually all staff over 18. The levy has increased over the years to 11% and will max out at 12% in 2025. Individuals can add their own contributions, too. The scheme is so big that the tax on contributions by employers and individuals brings in some 5% of federal tax revenue, making it the fifth-largest source of income for Canberra\u2019s coffers.<\/p>\n
More of that cash is being deployed abroad, helping turn Australia into a net exporter of capital over the past decade. Some 40% of the A$2.4 trillion managed by institutions is in overseas stocks and bonds, data from the Australian Prudential Regulation Authority (APRA) show. The pension funds are also channelling cash into unlisted investments. AustralianSuper owns 70% of Coal Drops Yard, a new development next to London\u2019s King\u2019s Cross Station, courtesy of a A$1.3 billion investment. ART owns stakes in Heathrow and Edinburgh airports. IFM Investors, which is owned by 17 super funds, holds chunks of assets in Europe and the United States including Anglian Water, Vienna Airport and the Indiana toll road.<\/p>\n
Superannuation assets remain relatively fragmented, though. Around A$870 billion are in 600,000-odd self-managed funds, with the rest divided between 150 or so institutional players. But some 60 mergers since 2011, based on KPMG data, have helped create eight companies which each manage more than A$100 billion and between them account for more than half of all institutionally managed funds. The largest, AustralianSuper, oversees A$300 billion, two-thirds more than three years ago; boss Paul Schroder expects that figure to reach A$500 billion by 2026.<\/p>\n
More tie-ups are likely. Size confers economies of scale which means lower fees. The bigger funds charge on average almost half as much for each dollar they manage as smaller providers, according to APRA. That puts pressure on the 100 or so funds managing less than A$10 billion to join forces with larger rivals.<\/p>\n
Two other factors have capital-hungry institutions knocking on super funds\u2019 doors. First, less than half of institutional superannuation money is managed in-house. That means there\u2019s a growing pot currently worth A$1.3 trillion for traditional and alternative fund managers to fight over.<\/p>\n
Second, because a lot of these asset managers owe their existence to the 1992 law, many of their pension-saving members are quite young. This is especially true of so-called industry funds that are mutually owned and initially catered to specific sectors such as higher education employees or hospitality workers. At $100 billion Hostplus, for example, the average member is just 37.<\/p>\n
This subset of the industry is responsible for around half of all institutional money. A mix of younger members and the influx of cash from the guarantee means all industry funds with more than A$50 billion in assets are bringing in more in contributions than they\u2019re paying out in pensions, according to KPMG.<\/p>\n
These funds therefore have a fast-growing surfeit of cash they won\u2019t need for perhaps decades. That\u2019s why they are showing up in more private equity and infrastructure deals: Aware Super and Australian Retirement Trust last year joined Macquarie in taking a large stake in the Victorian State Department of Transportation\u2019s registration, licencing and custom-plate business. AustralianSuper, ART and UniSuper were part of the consortium that bought Sydney Airport for A$24 billion. Property and private credit offer more opportunities to deploy cash: Hostplus has around half of its flagship fund invested in unlisted assets. AustralianSuper, ART, Aware and others are opening or expanding offices in New York, London or both to sniff out more deals.<\/p>\n
Governments have spotted the opportunity. Australian Prime Minister Anthony Albanese\u2019s federal administration wants super funds to help finance affordable housing, stumping up A$575 million of taxpayers\u2019 cash to boost returns. Daniel Andrews, premier of Victoria, has earmarked industry super funds as minority investors in a state-run plan to build renewable energy plants.<\/p>\n
Professional financiers are also getting involved. One of the reasons private equity groups like Blackstone (BX.N) and CVC have built up their teams in Australia of late is to persuade super funds to become limited partners, several insiders told Breakingviews.<\/p>\n
Yet financiers who think they have detected a new favourite piggy bank will discover these funds are no pushover. Recent regulatory changes mean watchdog APRA now assesses their returns against a benchmark each year. Any institution falling short of that yardstick by 50 basis points or more for two years is suspended from taking on new clients.<\/p>\n
That raises the bar for accepting the relatively high fees charged by private equity firms and makes managers rightly wary of any investment which promises outsized returns. Local regulators are also taking more note of how asset managers value their unlisted assets. Recent ructions in real estate have prompted some super funds to reassess whether the risk and complexity are justified.<\/p>\n
A growing number of international financiers will still make the trip to Melbourne. But they shouldn\u2019t be surprised if they often leave with a full belly, the taste of a quality flat white \u2013 and empty pockets.<\/p>\n
Source: The Cable<\/p>","protected":false},"excerpt":{"rendered":"
Ask Hong Kong-based financial bigwigs where they have been jetting off to since the Asian hub lifted its coronavirus restrictions and a surprising number say Melbourne. Sure, mining giant BHP (BHP.AX) has its headquarters in Australia\u2019s second-most populous city, it\u2019s a self-anointed coffee capital and boasts top-notch restaurants. It is also home to some of […]<\/p>\n","protected":false},"author":4,"featured_media":16388,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[],"class_list":["post-16387","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles"],"yoast_head":"\n