How can superannuation funds invest in innovation?

This week I spoke at the Ausbiotech conference in Melbourne on the role of superannuation investing in life sciences, proposing the establishment of a Superannuation Innovation Forum.

Following are notes from my speech:

Superannuation and Life Sciences Speech
AUSBiotech Conference, Crown Conference Centre, Melbourne
Tuesday 6 October 11.30am – 12.00pm

Today I want to focus on how we can get superannuation funds to invest in innovation.

This question is directly related to life sciences. But it is broader. If we can establish the right environment, then we will see investment flow to technology companies, advanced manufacturing and other entrepreneurial companies benefit.

There is a ground dog day element to this discussion that as a nation we have never been able to quite address.

The fundamental reason why is that government, superannuation and industry talk at each other – not to each other.

One of the perennial problems is that when talking about innovation, government become besotted with the idea of establishing a venture capital culture in Australia. This is backed by Ministerial tours to Silicon Valley and discussions with venture capitalists.

I am afraid that our policy makers have spent far less time talking to the heads of superannuation funds – who are literally next door.
So let’s talk about the obstacles that are preventing capital flowing to innovation.

Government

Part of the problem is that the Governments own rules make it difficult.

Superannuation funds have been required to manage liquidity in order to meet redemption requests and member choice requests.

This is one of the real costs of the choice of fund that we all individually are able to access. My ability to transfer assets within a couple of days anywhere in the system means that superannuation funds can only ever invest a tiny proportion of investments in unlisted assets.

There has been discussion on the need for liquidity facilities and special rules that could enable super funds to invest more in illiquid assets – but unfortunately we have not seen progress on this issue in the recent Financial System Inquiry.

Venture Capital

The second issue is the venture capital model.

Venture capital is at its heart an investment structure. One of the problems with venture capital is that it is not ideal for superannuation funds. The key issues are:

1. Investment volatility
2. Fees
3. Flipping

Again we need to understand the impact of one arm of government policy – which requires disclosure of fees and has established low cost accounts – MySuper. Venture capital is more expensive and for a system that has been designed to be fee sensitive this is an issue.

Returns from VC have also been volatile, which is again not suited to a system where individuals carry investment risk.

Where super funds do invest in VC one of the problems they encounter is the flipping culture. If superannuation funds do take risks on illiquid investments they have no incentive to sell to realise a short term capital gain. They have an interest in holding for the long term.

Superannuation

The third issue is the superannuation industry itself. A key factor that supports investment is knowledge. In the case of infrastructure investment, we have built up knowledge over the last 20 years. The result of this accumulated knowledge is that superannuation funds feel more comfortable allocating to infrastructure. This same level of knowledge does not currently exist in sufficient depth in innovation.
How do move forward?

The first thing I am advocating is the establishment of a Superannuation Innovation Forum – an independent group funded by Government, industry and stakeholders – whose job it would be bring the superannuation industry, government and industry together to develop solutions.

One of the functions of such a group should be to develop investment models that enable superannuation funds to invest. This could involve collaborative models and may require changes to regulation.

The forum should involve all stakeholders, including the ASX – which will remain the major source of capital flow from superannuation funds and which is already a major source of capital flow for small cap stocks.

What kinds of outcomes could we see?

One thing I would like to see is the emergence of a series of Autralian Innovation Companies that are listed on the ASX with the major shareholders being superannuation funds. The purpose of these companies would be to invest in our entrepreneurial companies – including life sciences. When investments succeed the Australian Innovation Company would not sell – it would use the cash-flow to fund future investments with the aim of building a company that in the end has global scale.

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