Heatmaps, performance test inflict 27% hit on venture capital, private equity

Venture capital and private equity investment by superannuation funds has taken a 27% hit because of Government policy including the Australian Prudential Regulation Authority’s heatmaps the Your Future, Your Super performance test, according to the Australian Investment Council (AIC).

The AIC has told a Parliamentary committee that while MySuper products which allocate to private equity and venture capital have achieved higher returns, allocations have declined significantly over the past four years.

“The primary driver of superannuation member outcomes is risk-adjusted net returns, making private equity and venture capital (PEVC) a compelling asset class for superannuation investment,” the AIC said in answer to a question on notice from the Parliamentary Joint Committee on Corporations and Financial Services.

“PEVC has an annualised 10-year return that is 10.8% higher than Australian listed equities. MySuper products which allocate more to PEVC achieve three times the fee efficiency compared to products with below-average allocations,” it said.

“However, we can see a significant reduction from the investment percentage of superannuation schemes into private capital in 2019 (47%), compared with 2023 (20%),” it said.

“There are key aspects of the regulatory framework for superannuation that actively works against funds optimising net returns for members. These include:

1. ASIC Regulatory Guide 97 (RG97);
2. the Your Future Your Super (YFYS) performance test;
3. the APRA Heatmap (which is based on 1 and 2 above); and the
4. the ATO MySuper Comparison tool

“These aspects of the framework, prioritise fee reduction over net returns and creates an unlevel playing field against unlisted assets uses an inappropriate benchmark, creating distortionary behaviour that leads to sub-optimal outcomes for super fund members.

“According to modelling commissioned by the Australian Investment Council, these regulatory barriers are costing individual retirees on an average income up to $20k through under-allocation to PEVC,” the AIC’s answer said.

“In addition to leading to poorer member outcomes, the Australian economy and communities miss out. The current sub-optimal allocation to PEVC, which invests in start-ups and growth businesses, costs up to 140k Australian jobs and investment into priority areas of need such as transition to net zero, health care, aged care and disability care and modern manufacturing,” it said.

“Net returns is most important metric for member retirement outcomes and this should be reflected in the regulatory framework. Regulatory reforms that prioritise net returns over striving for the lowest possible fees would address this poorer member outcome and enhance transparency.”