With billions of dollars to invest, superannuation funds are allocating a small amount to venture capital and later stage private equity (VC and LSPE), with data showing just $9.3 billion was committed to this sector in 2010/11 of the total $1.28 trillion asset pool held by superannuation funds.
As at 30 June 2011, investors had $15.9 billion committed to VC and LSPE investment vehicles, a fall of 8 per cent on the revised $17.3 billion committed as at 30 June 2010, according to data released by the Australian Bureau of Statistics (ABS) last week.
Most of those funds were sourced from Australian superannuation funds, which committed $9.3 billion of capital or 59 per cent of total funds. Of the $15.9 billion committed, $5.1 billion was committed via fund-of-funds investment vehicles.
Offshore pension funds committed $1 billion in 2010/11.
That level of investment by super funds represents a small decline from preceding years' investment, with domestic super funds having committed $10.4 billion in 2009/10, $9.9 billion in 2008/09 and $9.7 billion in 2007/08. However, it is still up on the $8.5 billion committed in 2006/07.
Frontier Investment Consulting senior consultant Allison Hill said the firm recommended its clients, which were government, industry and corporate funds, made allocations to private equity.
"Frontier recommends clients typically allocate around 3 per cent of their investments to Australian private equity. Of that 3 per cent, about 20 per cent is typically allocated to venture capital," Hill said.
"Our clients are primarily on the government, corporate and industry fund side and many have strong cash flows so they can afford to make modest commitments to such illiquid assets."
She said returns sought by Frontier's clients on private equity investments were those on the listed market plus 5 per cent, net of all fees. A greater return is sought from venture capital as greater risks are involved.
"There is a raft of risks involved as we're investing in new companies, which may involve technology risks, commercialisation risks, business growth risks and marketing risks," she said.
"So it's a difficult market, so we look at taking a diversified approach by investing via fund of funds and we seek an appropriate level of return."
VC and LSPE is defined by the ABS as high-risk capital directed towards businesses with prospects of rapid growth and/or high rates of returns.
A government senate committee noted in 2010 that superannuation funds did not have a large involvement with venture capital. Many experts have noted that large retail funds steer clear of the sector because of the illiquid nature of investments, the long-term horizon of the investment and the global shift by investors towards safer asset classes, such as cash.
Hill said while there was some degree of pullback from private equity during the global financial crisis, "that's because there were opportunities elsewhere, such as distressed investment internationally, while some investors shifted funds to more liquid assets".
"Otherwise, the nature of private equity investments are lumpy given the nature of fund raisings is periodic," she said.
According to data from Chant West, about 2.5 per cent of assets held by growth funds (those holding 61 per cent to 80 per cent in growth assets) were directed towards private equity investments.
