Superannuation pool hits $1.23 trillion – but where is the cash for venture capital?

The chief executive of the Australian Private Equity and Venture Capital Association says the Government should look at forcing rapidly growing super funds to invest in venture capital to ensure funding flows to small, innovative companies.

While new figures from the Australia’s superannuation regulator APRA have shown that the total amount invested in Australia rose 13.9% to $1.23 trillion in 2009-10, AVCAL chief Katherine Woodthorpe says virtual none of this money is flowing to venture capital.

She says the sheer size of many funds mean they don’t want to bother investing in the venture capital sector, where investments can be as small as a few million dollars.

“The bigger the superannuation funds get, the harder it is to write a small cheque. Even the ones that want to invest in VC find it hard to do so,” Woodthorpe told SmartCompany today.

“Tomorrow’s economy depends on the innovative companies of today surviving and succeeding. And they need to access to finance. We need to find ways to encourage that financial support.”

Woodthorpe says some states in the US have introduced regulation forcing pension funds to invest a tiny proportion of their funds into venture capital and says such laws should be looked at in Australia.

She suggests while the amount that super funds should put into venture capital might be relatively small – perhaps just 0.1% of a fund’s total assets – the government could offer funds a special tax break, or the loss of existing tax breaks, to encourage the VC investment.

“Superannuation funds exist by governments mandating that we give them their money. They get beneficial tax breaks. I don’t think they can’t just turn around and say, we don’t think you should interfere.”

The super statistics also show that the bitter battle between retail (for profit) and industry (not-for-profit) superannuation funds continues to be closely fought.

According to APRA’s annual report into the super sector, retail funds (which are typically owned by banks and wealth management companies) produced a return of 8.7%, compared with a slightly lower return of 8.5% from industry funds (which are typically run by unions).

Public sector funds returned 9.8%, while corporate funds produced average returns of 8.9%.

The overall average return of 8.9% represented the first positive return since 2006-07, when the economy was on the brink of entering the GFC.

While APRA’s figures will be welcomed by the retail funds sector, APRA has fired a shot across the bows of the retail funds sector with a warning on potential conflicts of interest within these funds.

The recent Cooper Review of superannuation stipulated that super funds must “act in the best interest of members” which means conflicts of interest must be avoided.

However, most retail funds have a proportion of their assets invested with so-called related parties – that is, entities owned by the bank or company that also owns the funds.

APRA says it is an issue the funds must watch.

“It is important that trustees identify and manage potential conflicts as they make asset placement decisions to ensure minimal leakages from member investment returns,” the regulator says its report.