The Private Equity Holdouts

Private equity managers have recently enjoyed immense popularity among asset allocators – but not all institutional investors are buying into the hype.

Superannuation schemes — Australia’s version of defined contribution plans — remain underinvested in private equity and venture capital compared with pension funds globally, according to a recent report from data firm Preqin. While almost half of all pension funds have a greater than 5 percent allocation to private equity, more than two-thirds of superannuation funds invest less than 5 percent of their portfolios in the asset class, the report said.

It’s not for a lack of interest in alternative assets: Super funds have higher allocations to real estate and infrastructure than other retirement plans, and are not that far behind their global counterparts in terms of the proportion of assets committed to hedge funds.

Overall, Preqin said the Australian pension schemes invest about 19 percent of their portfolios in alternative asset classes, citing data from the Association of Superannuation Funds of Australia. With super funds overseeing 2.7 trillion in Australian dollars (roughly $2 trillion USD), this amounts to about A$513 billion.

“Superannuation funds are not new to private equity, but since 2008 the asset class has held a very poor reputation alongside hedge funds, having not always delivered what it promised in terms of returns,” the Preqin report explained.

In addition to “sub-par returns,” the report named illiquidity, high fees, and high valuations as other barriers to greater investment by super funds.

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Their relative disinterest in private equity is not limited to buyout funds: Venture capital has also been “plagued with a poor reputation,” according to the report. Preqin cited the Australian VC market’s “lack of success stories, lack of information to make structured decisions comparative to other asset classes, smaller opportunities, and an ecosystem that is not mature enough to support a good level of deal flow.”

One superannuation scheme interviewed by Preqin said most super funds “see more downside to VC than upside,” explaining that the asset class doesn’t accomplish enough to move the dial in terms of overall returns. “Chasing the right talent for it is also difficult,” the investor said.

Although the proportion of super funds investing in VC grew between 2014 and 2016, rising from 58 percent to 63 percent, there hasn’t been much change since: As of 2018, 64 percent of superannuation schemes were active in venture capital.

“VC still has some way to go in winning the hearts and minds of the Australian superannuation industry,” the report concluded. “Many are still averse and there are doubts over how quickly that change would come.”