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Super funds on way to $5 trillion, looking overseas

01 July 2014  |  Investing

OSThe inexorable rise in the size of super funds is continuing. There is now $1.8 trillion under management, which is about the same size as the Australian stock market. It is estimated to rise to $5.2 trillion in 15 years. That will progressively mean that they are too big for the Australian capital markets, forcing them to look offshore.

Ordinarily, that would be good news for the intermediaries, such as private equity (PE) firms. But it is likely to work the other way. According to the AFR, super funds are increasingly bringing in the investing in house, cutting out the middle men:

"Macro forces have been cutting off the smaller end of the PE and venture capital sector from their prime source of equity – super funds – for some time.

Due to pressure to reduce costs, super funds are trying to cut out the PE middle men by investing directly in companies, or forcing PE to allow co-investments from super funds.

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These trends may change if the returns that result in this strategy don’t stack.

But even if they don’t, it will be too late for many funds.

The bigger the fund, the bigger the minimum investment size for super funds. Even now, the minimum investment amounts are too much to swallow. As a result, the interests of the Australian Private Equity and Venture Capital Association [AVCAL] are closely aligned with how well Australia manages to direct local funds to new industries."

For SMSFs, private equity may be an option, but there has to be considerable scepticism about their high fees. As a general rule, the higher the fee, the lower the return over time:

"But that means convincing many small investors private equity are not the barracudas of the corporate world, not to mention regulators under fire for not doing enough to protect retail investors. So if you’re an SMSF, you’re going to see even more appeals for your funds as AVCAL ramps up its “Building better businesses” campaign to bust some private equity myths."

 

 

 


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