Super funds 'playing to their strengths' in private markets

Super funds are proving a good case study for investing in private assets, according to Morningstar's 2025 outlook.

"Australia's super funds have successfully pioneered investment in asset classes such as unlisted infrastructure and property for decades, and many have made forays into private credit and private equity," the report said.

"Today, around 16.5% of sector assets are invested in private assets, although for the largest cohort, so-called 'industry' funds, this figure exceeds 20%, with unlisted infrastructure as the most popular private asset allocation.

"By allocating to private assets, Australian pension funds are playing to their strengths; their long-term investment horizon and liquidity profile neatly align with those of private assets."

The report said that due to superannuation being compulsory, super funds can count on a steady and predictable stream of cash inflow to provide appropriate liquidity buffers.

"This enables a greater allocation to illiquid assets while being able to deftly handle sudden market selloffs and manage longer-term demographic risks. As one of the key drawbacks of private assets-liquidity-is less of an obstacle for pension funds, the benefits of the asset class can be more freely utilised," the report said.

However, the report warned that private asset investments by super funds have their drawbacks, including valuations being less frequent compared to public assets and a lack of regulatory oversight.

"A sharp, sudden economic jolt may see listed equities devalued instantaneously; private assets, meanwhile, may not be revalued for months thereafter," it said.

"This can benefit members who switch out of their super fund before a private asset revaluation, while those remaining are left to absorb the eventual devaluation. For this reason, super fund policies around out-of-cycle valuation triggers are receiving increased attention."

A recent example of this came just this month when HESTA agreed to make payments to two cohorts of members impacted by valuation decisions make by the fund in March 2020.

HESTA made downwards adjustments to five single sector Choice options invested in unlisted assets but did not adjust other options with exposure to the same underlying unlisted assets - including HESTA's MySuper option - until a week later.

"The superannuation fund experience demonstrates that private assets can play a positive role for individual investors, albeit in a setting such as retirement planning, where their potential drawbacks are tempered, and their benefits can be more freely cultivated," the Morningstar report said.