Industry Super Australia argues there are reasons superannuation funds aren’t lending more to business, pouring cold water on calls from big business for increased lending. However there might be a case for lending to small and medium businesses.
The last year has seen big business call for super funds to lend more to Australian business. In November 2017 the Australian Financial Review and Visy hosted the Superfunds Round Table – the main take away of which was a push from business leaders and financiers for increased super fund lending. This was followed by a series of articles in the AFR.
However Industry Super Australia Chief Economist Stephen Anthony argues that there are good reasons super funds aren’t lending more to business, in a new discussion paper: Should superannuation funds do more direct lending?
The reasons include that larger Australian businesses can source funding from overseas, overseas funds tend to be defined benefit – making it easier for them to plan outflows, super funds are focused on growth assets, funds can’t cross-subsidise business with other activities like banks can, funds generally lack knowledge around lending and the assets super funds already invest in have similar risk-return characteristics.
Though the discussion paper notes that there could be a case for superannuation funds to lend to Small and Medium Enterprises (SMEs).
“Interestingly, those calling for greater superannuation fund market participation are not SMEs. They are large corporates that expect long-term money to be available at rates not much higher than shorter term commitments. This is a doubtful proposition from a risk and reward point of view,” says the discussion paper.
“Whether this is in the best interest of super fund members from a fiduciary perspective, is questionable.”
The paper suggests that big business have unrealistic expectations for the terms of loans from super funds.
“Some high profile Australian business owners are urging superannuation funds to provide debt for 10, 20 or even 30 years to fund domestic and overseas expansions. Often these business owners want fixed rate funding to take advantage of current low interest rates. Superannuation funds have CPI plus targets and a natural bias towards floating rate assets.”
“The combination of illiquidity, interest rate risk and credit risk, results in superannuation funds expecting higher returns than borrowers often expect to pay.”
“Are returns from direct lending compelling enough for Australian superannuation funds? We have seen many alternative risk adjusted investment opportunities across asset classes that may outperform the typical direct lending proposition.”
Though if “certain obstacles” can be overcome “direct lending could be very attractive”, provided the investors are “appropriately rewarded”.
“Australian superannuation must continue to innovate. So, engaging in long-term credit provision is a desirable activity where the rewards are appropriate for this class of risk asset. However, to make such long-term investments, superannuation funds need a pay-off that is much closer to an equity return.”
“Unfortunately, some participants expect longer term money to be available at rates not much higher than shorter term commitments. Providing cheap long-term debt doesn’t make sense from a risk and reward point of view unless returns compensate for risk, lower liquidity and longer tenures. It is only then that superannuation funds may become interested in lending to corporate Australia.”