Private Capital: Australia's Untapped Opportunity

The primary driver of superannuation member outcomes is risk-adjusted net returns. This makes private equity and venture capital (PEVC) a compelling asset class for superannuation investment.

Superannuation funds can maximise returns by investing in PEVC, which has an annualised 10-year return that is 10.8 percentage points higher than Australian listed equity.

MySuper products which allocate more to PEVC achieve 3x the fee efficiency compared to products with below-average allocations, due to fees 'purchasing' superior returns. PEVC also has diversification benefits, and a patient capital approach which suits superannuation funds.

Despite these benefits, superannuation funds are under-allocating to PEVC, negatively impacting member retirement outcomes.

Modelling within this report has found that, to maximise net returns from MySuper products while maintaining the existing balance between growth and defensive investments, an additional $54 billion should be invested into PEVC. This would bring Australia's allocation to PEVC closer to the best performing global pension funds.

An enhanced allocation to PEVC would boost retirement income, and support additional jobs in Australia. The PEVC under-allocation is costing retirees up to $20,000 - comparable to the benefits they would gain from raising the Superannuation Guarantee from 12 to 12.5% - as well as costing up to 140,000 Australian jobs. Under-allocating to PEVC also risks Australia missing out on capturing opportunities in priority areas. PEVC can provide capital for the energy transition, modern manufacturing, and the care sector.

Regulatory barriers are key factors leading to the under-allocation to PEVC by superannuation funds. Australia's allocation to PEVC has not increased in line with international trends. This is despite Australian PEVC being an attractive opportunity, demonstrated by increases in international funding.

Regulatory Guide 97 (RG 97) and Your Future, Your Super (YFYS) are regulatory barriers contributing to the under-allocation to PEVC. RG 97 incentivises prioritising fee reduction over net returns and creates an unlevel playing field against unlisted assets. The YFYS performance test uses an inappropriate benchmark, creating distortionary behaviour that harms member outcomes.

Fixing the distortionary effects of RG 97 and YFYS would improve member outcomes and grow the pool of capital for Australian projects. To address the distortionary effects of YFYS, funds should be benchmarked based on net returns, the most important metric for member retirement outcomes.

Three additional key actions are recommended to help fix the distortionary effects of RG 97 and improve member benefits: 

1. Reporting an additional fee efficiency metric 

2. Prioritising net returns 

3. Providing clarifying information on investment fees PEVC is a key mechanism to improve member retirement outcomes and enable superannuation funds to invest in innovation and growth. 

Small regulatory adjustments which have little to no cost to employees, employers and government could lead to materially better retirement outcomes for superannuants as well as a greater pool of capital to fund the nation's priorities.

Read the full report here.