Could 2016 be the year super moves into the start-up space?

Published at Jan 20, 2016, in Features

As long as superannuation funds have been around in Australia, there’s always been a call to make better use of the trillion-odd dollars floating around – but could 2016 see a shift into start-up funding?

Back in September last year, there was a fairly big watershed moment for start-up funding in Australia.

Two superannuation funds in the form of First State Super and HostPlus Super got involved in the start-up game by throwing a combined $145 million into an Australian venture capitalist fund, Blackbird Ventures.

Reportedly, the fund has about $200 million to play with – but the involvement of superannuation funds raised a few eyebrows.

Before the superannuation funds became involved, Blackbird was able to provide angel, seed, and series A funding. However, with the financial muscle the superannuation funds provide, there is scope for the fund to follow-through the start-up’s funding cycle.

The ability for a venture capital fund to provide that kind of follow-through is something not typically seen in Australia.

One of the recurring themes which has been running through the start-up space for the past few years is the tendency for promising Australian start-ups to depart for the US, London, or even Tel-Aviv when it came to put the idea into overdrive.

The Australian investment community helped get the ideas off the ground, but couldn’t provide the financial weight needed to establish the business they helped.

However, two established superannuation funds coming to the VC party in a big way has the potential to open a few more eyes to the possibilities.

Superannuation funds have invested in VC funds before, but these have always been on the smaller side of the equation with those VC funds specialising in early-stage funding rather than the big, beefy B and C series rounds start-ups in Australia have needed.

Every so often various industries have wondered “how do we get some of that superannuation money?”, and for fairly good reasons too.

Political football

There’s over $1 trillion in capital floating around there, pumping liquidity into the sharemarket through managed investment vehicles, typically looking at a combination of cash, equity, and property (typically through A-REIT products).

It’s a huge amount of money in the Australian market, and fund managers with superannuation funds are often courted as such.

It’s also why every so often superannuation gets kicked around as a political football.

Early last year now-deposed treasurer Joe Hockey proposed allowing first home buyers to access their superannuation to pay for deposits.

It was generally thought of as a pretty bad idea on a broad level, as it would heat up an already heated property market and encourage young people to use their superannuation as a piggy bank.

The whole point of superannuation when the Hawke/Keating governments brought it in was to provide security in retirement and reduce the pressure on the Commonwealth pension.

Accessing super early would contravene that aim, it would seem.

It’s for this reason that proposals for ‘that superannuation money’ to be poured into property, infrastructure, or any other number of sectors looking for immediate capital are generally shot down.

Superannuation is seen as a sector which could do more good with its investments in an altruistic fashion, but they’re not generally set up to do that.

Traditional routes cooling off?

Superannuation funds, by their very definition and legislation to that effect, are set up to make money for their members.

It’s the entire point of the funds.

Superannuation funds do not exist to provide a large pool of capital for industries which need access to huge amounts of cash, such as the start-up community in Australia.

So superannuation cash invariably makes its way to assets which have the potential to provide longer-term returns on a steady basis. There are variations in funds, of course, but the vast majority of workers in Australia have their money in a default, ‘MySuper’ product.

The investment philosophy in these products are rooted in conservatism – it’s more about consistent returns than blockbusters.

The opportunities for traditional, steady growth however, are dwindling.

The resources sector is going through a well-publicised struggle with commodity prices, there are emerging signs that the housing sector could just cool off a touch (admittedly it’s been overheated for years), and even the big four banks are looking a touch less rosy than they once were.

In light of this, is a shift of thinking on the cards for superannuation funds?

Is a depressed investment environment forcing super funds to think outside the box for longer-term returns for their members?

The First State and HostPlus investment could be the first of a number of superannuation funds looking to think outside of the box for the next source of member returns.

By their nature, tech-focused start-ups look outside of Australia for customer growth and with the Australian dollar currently riding low against the greenback, this could be another lure for super funds to get involved.

Even the Prime Minister of Australia is getting excited by the ‘age of innovation’, a sign that start-up ventures have a new air of legitimacy.

Superannuation funds traditionally hamstrung by their investment charters and alternate assets remaining attractive may be able to find the justification to place a few more bets on start-ups as more traditional assets start to slide and start-ups gain more momentum in Australia.

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