The Pension Difference Down-under

Like Canada, Australia is home to private equity markets that have occasionally had to struggle against setbacks, including those of the 1980s, before delivering a consistent stream of returns to investors and the economy. Also like this country, government in Australia has exerted its influence to bolster capital inflows and redirect venture investment to start-ups, early stage developments, high technology SMEs and transactions located in the regions. Unlike Canada (and more like the status quo in the United States), the predominant source of supply to these markets are Australian pension funds.

At the end of 1997, the Australian pool for institutional venture capital stood at over $1.6 billion, $744 million of which was directed to 307 investee firms (along with about $29 million in commitments). These data reflect substantial increases in the total capital under management in the market as well as investment growth rates over the 1990s. At present, around one-third of investee firms are technology-intensive, while somewhat less than one-fifth are situated in manufacturing and other exporting industries. SMEs form the vast majority. Eighty-six percent of all investing goes to expansion projects, 5 percent to start-ups and the balance to more mature, merchant banking-like deals (e.g., leveraged management buy-outs). Some of the top venture capital institutions are also active in New Zealand.

Providing the fuel for this rapid development are pension funds, bringing 72 percent of new supply commitments to the venture capital market last year. Moreover, the pension share in cumulative supply over time is 62 percent, followed by the banks at close to 15 percent. Among the most prominent of these have been jointly-trusted, industry superannuation funds, a recently-established supplementary system to Australian employer-sponsored pension funds in the private sector. Industry funds have been responsible for well over half of all supply from this source with the largest of these now aiming to allocate between 3-5 percent of total assets. Public sector funds are the second largest group.

The participation of industry funds was significantly advanced in 1990 with initiation of the Development Australia Fund (DAF). This fund-of-funds was designed to pool pension assets for long-term investment through private capital markets that yields demonstrable collateral benefits, such as stimulation of economic growth and job creation. Interestingly, it resulted from a consensus arrived at by national business and labour organizations, including the Australian Chamber of Manufactures, the Australian Council of Trade Unions and the AMP Society. In 1997, DAF managed over $400 million in assets and operated a venture capital portfolio based on direct co-investments and commitments to externally managed sub-pools. Other mandated objectives include financing of infrastructure and residential housing.

Pension participation in venture and non-venture forms of private equity in Australia has been impeded by many of the same structural market barriers identified in Canada. To address these, effort has been put into developing pooling vehicles, such as DAF, and limited partnerships that respond to the needs and constraints of this institutional investor. There is also supply of, and demand for, gatekeeping intermediaries in the Australian markets, such as those found in the United States (see What's a Gatekeeper?).

Sources: Arthur Andersen, AVCAL 1997 Survey of Venture Capital, 1997; Coopers & Lybrand, The Economic Impact of Venture Capital, 1997; DAF Annual Report, 1997; Mathews, Iola (Rothschild Australia), Regions, Capital and Job Creation, 1998; CLMPC interviews

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