Superannuation and startups: funding Australian innovation

20th February, 2017

Super funds have more than $2 trillion of funds under management. What if a small percentage of that could be put aside to fund innovation in Australia?

Could Atlassian have stayed in Australia if the capital to fund its global growth could be found here?

In Superannuation and startups: Australia’s hidden $2 trillion fund, Australian Private Equity and Venture Capital Association Chief Executive Yasser Al-Ansary said regulation had forced super funds to focus too narrowly on their fees, but Spaceship CEO and Airtree VC partner Paul Bennetts has a different theory.

‘Alternative assets’

Bennetts thinks the focus on fees is a narrative rather than a regulation issue.

“If you have a whole bunch of undifferentiated products, you have to compete on something aside from the product,” he told The Pulse.

“If you look across superannuation funds it’s difficult to find any differentiation – they all feel the same. If that’s the case, the natural thing to do is compete on price.”

Spaceship has set up as a tech-focused superannuation fund, with a longer-term ambition to invest capital into the Australian VC and PE space.

“Everybody’s superannuation has an allocation to alternative assets, but most super funds’ idea of alternative assets is infrastructure, property and PE funds – and maybe a bit of VC if anything’s left over,” said Bennetts.

Super funds are all kind of same-same.

And when super funds look exactly the same, they compete on price.

Could providing members additional categories of ‘alternative assets’ be a handy differentiator for super funds?

The lack of investable deals

Australian Superannuation Fund Association CEO Dr Martin Fahey, however, dismissed suggestions that regulation and a focus on fees was playing a role in a reduction of superannuation money in the VC space.

“Super funds are always looking for new investment opportunities that are in the interest of fund members. Alternative asset classes are a large and growing proportion of superannuation fund investment portfolios,” Dr Fahey told The Pulse.

There’s a much simpler reason, he says, behind the perceived lack of superannuation money in VC funds.

“A record of poor returns and high fees charged by venture capital investment managers can discourage investment by super funds,” said Dr Fahey.

“Arguably it is a lack of investable deals rather than regulatory hurdles or lack of interest by superannuation funds that is constraining investment into venture capital and private equity.”

What comes first: the startups or the investment?

Al-Ansary said that superannuation funds were genuinely interested in getting into the VC space.

“Super funds have a tremendous appetite to invest in this space and in Australian entrepreneurs,” said Al-Ansary said.

“There’s a huge amount of interest in investing more capital into the space, so I think the future is bright if we get the policy and regulatory settings right.”

One problem, however, is that in the past there has been a lack of home-grown success stories. Even companies such as Atlassian (which is now bigger than Qantas) had to head to the US to get funded.

If the deal is right for superannuation funds, then fees aren’t going to hold them back – it’s more that there hasn’t been a lot to invest in.

Especially when there are literally thousands of other investment choices available.

So, what comes first, the startups or the investment pool?

Bennetts said that while that may have been the situation in the past, the Australian tech scene is now at a point where investments could be desirable, regardless of the fees needed to access the opportunity.

“I believe that moving forward has already started, and I don’t think it’s going to stop. It has enough momentum that both sides are going to sort themselves out,” he said.

“We’ve had had enough successes for the supply side to wake up and say ‘hey, we should probably put capital into this thing’.

“Super funds are going to wake up and you’ll see wholesale retail investors come into the market as well.”

Is it now simply a matter of time until more of the $2 trillion super pool is made available to the innovation sector?

Thanks to the early work done by tech startups and the VC funds willing to back them, we may finally be approaching critical mass.

READ: Australia’s hidden $2 trillion fund