Super funds are expected to increase portfolio allocations towards alternative investments, such as private equity, over the next 12 months.
But pressure is building for private equity funds to lower fees, profitably exit portfolio investments and return funds to investors, and generally lift their performance.
Super funds, some of which faced liquidity challenges due to member redemptions during the global financial crisis, failed to commit to a number of private-equity fund raisings last financial year.
Private equity funds raised in Australia plunged from $5.6 billion in 2007/08 to $1.2 billion in 2008/9 - the lowest since 2004 - Australian Private Equity and Venture Capital Association (AVCAL) data showed.
The local private equity industry raised $17.2 billion, mostly from institutional investors, between the 2005 and 2008 financial years.
About $7.1 billion was invested by private equity firms in 481 companies over this period, according to AVCAL.
Industry observers believe as much as $7 billion of committed superannuation funds are yet to be invested by private equity firms.
"Super funds are beginning to look again at alternative investments like private equity, after largely withdrawing from committing new money to this asset class during the GFC (global financial crisis)," Australian Private Equity & Venture Capital Journal managing editor Adrian Herbert said.
"But I don't expect super funds to allocate large slabs of new money to private equity capital raisings in the short term, given there is so much committed funding yet to be invested."
A balanced super fund may invest up to 5 per cent of funds under management in alternative investments, such as private equity, hedge funds or new investment opportunities, that are less correlated with other asset classes.
The global equity market rally from the March 2009 lows may have seen some super funds become underweight in their alternative investments by default - a reason why some will invest slightly more funds in this asset class.
Herbert said super funds would want to see private equity firms profitably sell or exit more investments in the next 12 months. AVCAL data showed private equity funds made 54 exits (of 37 companies) in 2008/09, with 32 divestments split equally between trade sales and write-offs.
Significantly, no investments were exited by initial public offers due to weak share market conditions and the poor post-listing performance of private-equity-vended floats, such as Myer Holdings.
"Private equity managers that have achieved a nice steady stream of capital returns still appeal to super funds and should be able to raise new funds," Herbert said.
"Private equity funds that invested in assets close to the top of the market several years ago and have little prospect of exiting them at the right price will find it much harder to raise new funds.
"Super funds commit to private equity funds to get higher returns than equities - not to have that money sitting around in cash getting low returns while they wait for it to be drawn down.
"And the longer it takes private equity funds to draw down commitments, the less time they have to generate high returns."
Super funds generally target absolute annual average returns from private equity of 15 per cent - or 5 per cent above average equity market returns.
Herbert said subdued returns from private equity over the past few years were encouraging asset allocation advisers to super funds to press for lower fees for future fundraisings.
Tony Featherstone is the former managing editor of BRW and Shares magazines.
