Australia's Pension Funds Hunt For Bargains in Private Markets

Amy Bainbridge of Bloomberg reports that Australian pension funds with $500 billion go bargain hunting:

Australia’s pensions giants, flush with cash thanks to surging inflows, are looking to private markets for discount deals as global asset prices come under pressure.

The A$85 billion ($58 billion) Construction & Building Unions Superannuation Fund is seeking to invest cash holdings that are “more than double” usual levels, according to new Chief Investment Officer Brett Chatfield. The fund joins rivals AustralianSuper Pty and Australian Retirement Trust in hunting quality assets as the industry rakes in more than A$1 billion a week in inflows.

Cbus is “very actively looking for opportunities,” Chatfield said in an interview Monday, citing private debt as a key area of interest “where we still think returns are fairly attractive.” The fund’s boost in firepower has partly come from selling off some equities, particularly overvalued US stocks.

Other areas of buying interest are infrastructure and property assets including office, retail and industrial buildings, as well as sectors overseas such as medical offices and multifamily residential, he said.

Aware Super, with A$160 billion of assets, has a “substantial amount” of cash to deploy on selective deals, Chief Investment Officer Damian Graham said in an interview. The fund is currently looking at opportunities in digital infrastructure, the clean energy transition and retirement living after recently buying a stake in a UK build-to-rent developer.

“We’re always thinking about making sure we’ve got enough liquidity in the portfolio so that we can be a buyer where we see distress, where we see opportunities,” said Graham. “If we do see a more meaningful recession or even if we see assets start to have to be sold for various reasons, we want to be able to lean into that.”

Australia’s pensions sector needs to deploy cash that’s pouring in from the nation’s compulsory retirement contributions that this month rose to 11% of workers’ salaries. The funds have plowed into private markets in recent years as they scout for returns beyond their own backyard, and are now seeking fresh opportunities as worsening economic conditions trigger the repricing of assets at home and abroad.

The sector is also enjoying a rebound in returns after enduring one of its worst performances ever in 2022. The funds’ default investment options returned an average 8.5% for the year through June, compared with -3.4% in the previous financial year, according to research house SuperRatings.

Property Losses

Australian Retirement Trust, with more than A$240 billion under management, said that property was still one of the “most exciting ways” to diversify away from traditional assets. That’s despite the fund, along with peers including Cbus, seeing write downs from office properties as commercial property woes linger.

“We’re quite comfortable investing into specific pockets of alternative property in the right markets where we can see the sort of demographic tailwinds that will give us some inflation protection looking forward,” ART Head of Investment Strategy Andrew Fisher said in an interview.

ART is continuing to look at alternative property sectors including multifamily developments, retirement villages and caravan parks in the US, he said. It’s also considering opportunities in the student accommodation, health care and self-storage sectors.

Australia’s Top Pension Looks to Spend Cash Pile as Rates Bite

AustralianSuper, the nation’s biggest pension with A$300 billion under management, is similarly poised for good deals. It has around 10% of those funds available for when asset prices improve.

“We’re starting to warehouse or build up cash with the idea that we can deploy that into other investments as pricing gets better over the next two to three years,” Chief Investment Officer Mark Delaney said in an interview last week, adding some of that cash had already been spent on bonds.

“The impact of high interest rates will eventually create opportunities and we want to be in a position to take advantage of them,” he said.

Australia's pension giants are flush with cash and looking to deploy capital into private markets.

Why is this the case? Note this part of the article:

Australia’s pensions sector needs to deploy cash that’s pouring in from the nation’s compulsory retirement contributions that this month rose to 11% of workers’ salaries. The funds have plowed into private markets in recent years as they scout for returns beyond their own backyard, and are now seeking fresh opportunities as worsening economic conditions trigger the repricing of assets at home and abroad.

Australia has a forced defined-contribution scheme which covers everyone and therefore doesn't have the coverage issues we have in Canada.

This is why it has one of the best retirement systems in the world but is far from perfect (see below). 

It's also worth noting their performance last fiscal year (through June) while negative wasn't too shabby:

The sector is also enjoying a rebound in returns after enduring one of its worst performances ever in 2022. The funds’ default investment options returned an average 8.5% for the year through June, compared with -3.4% in the previous financial year, according to research house SuperRatings.

This is because they also invest across public and private markets and now see the rise in rates as an opportunity to invest more in certain private markets across the world.

Now, I'm not privy to their approach in private markets and how much they invest internally as opposed to outsource to external managers (I suspect they outsource a lot).

The reason I bring this up is because Canada's large pension funds manage most of the assets across public and private markets internally, co-investing alongside private equity partners to lower fees.

What else? How does the CPP compare to Australia’s superannuation funds?

You can read this older Benefits Canada article here to gain more insights and I note the following from the article:

• Down under, responsibility for compulsory contribution lies solely with the employer, while employee contribution is voluntary. Also, Australia’s superannuation system is based on individual accounts, like a defined contribution plan, compared to Canada’s collective CPP, which is a defined benefits plan.
• Since it’s essentially a DC plan, Australians have considerable flexibility in choosing their investment strategies based on their own preferences and circumstances.
• Plan members can also withdraw their superannuation account balances as a lump sum at retirement, or even before, and without penalty in cases of severe financial hardship, to meet the cost of medical expenses and in the case of terminal illness. The plans also fully vest to the individual and can be bequeathed on death.
• Rob Vandersanden, an international pension consultant and partner in retirement solutions at Aon, believes the CPP is a more efficient and secure way of delivering retirement benefits than most DC plans. “When you look at a typical return earned in an individual DC plan, it tends to lag what you’d earn in DB plans overseen by pension committees comprised of professional advisors.” Individuals, he adds, are asked to make complicated investment decisions they’re sometimes not comfortable with. “They tend to avoid risk and end up with a smaller pension as a result.”
• Perhaps the biggest criticism faced by super funds is their scant protection against longevity risk. According to Orford, fewer than one per cent of Australian retirees elect to receive their retirement benefits in the form of a lifetime pension that broadly keeps up with inflation.“That’s why, while the size of Australia’s superannuation assets is greater than those in Canada — despite Canada’s population being roughly 50 per cent larger than Australia’s — Canadians outperform us in their standard of living in retirement.”

It is clear that Australia's retirement system has some advantages (coverage) and disadvantages (essentially a DC plan with all its faults).

But the people who manage these superannuation plans are doing their job diversifying across public and private markets and geographically (by law, they need to invest more in Australian shares than Canada's pension funds need to invest in Canadian shares). 

And their approach of waiting for dislocations in private markets as rates rise is the right one.

It shows you how competitive the hunt for global bargains in private markets will be as all this capital needs to be deployed.

Canada's large pension funds are also bracing for these dislocations in private markets as rates rise and are ready to deploy capital as deals present themselves.

Below, in this latest performance update, Mark Delaney - Deputy Chief Executive and Chief Investment Officer at AustralianSuper, discusses the Fund’s performance for the six months ending 31 December 2022, and his outlook for investment markets. You can read transcript here.