Super funds face long-term lending challenges – The Australian Financial Review

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Superfunds Roundtable. From left: Linda Cunningham, Cbus Super Australia; Kristian Fok, Cbus; Gina Rinehart, Hancock; Anthony Pratt, Visy; Paul Keating; John Fraser, Dept of Treasury; Lindsay Fox, Linfox; David Neal, CEO, Future Fund. Photo by Peter Braig. 23 November 2017.

Lack of expertise in assessing lending risks, constraints on investing in illiquid assets and the reluctance of some businesses to pay higher rates for long-term debt are among the impediments to superannuation schemes providing direct long-term funding to Australian companies. 

While super funds said the challenges in developing a substantial private placement market in Australia were surmountable and acknowledged that progress was being made, they also pointed to stiff competition from the banks, which were able to lend to companies at cheaper rates by subsidising those rates through ancillary services such as foreign exchange.

Large institutional lenders, on the other hand, needed to earn a reasonably high rate of return on long-term loans, say of five years or more, said participants at a Superfunds Round Table hosted in Sydney by packaging group Visy and The Australian Financial Review.

Super funds must retain sufficient investments that can be sold at short notice so that members can switch funds and individual investment options freely.

“We have a liquidity budget. We are better off using it on higher return investments because we get paid more,” said one large institutional investor.

Mark Delaney, chief investment officer of AustralianSuper, the country’s biggest industry super fund with $120 billion of assets, said it was also important that an Australian private placement market grew to a sufficient size so that companies could rely on it.

“The market needs to get to a critical mass, otherwise corporates won’t regard it as a viable place for funding,” Mr Delaney said.

In March, Visy struck a groundbreaking deal to raise $150 million over 10 years from AustralianSuper and Melbourne-based fund manager IFM Investors. Companies hope it will be the first of many such deals, which will give them an additional source of finance and obviate the need to raise money in the US private placement market, which is estimated at more than $AUS50 billion.

Mr Delaney said the banks, which have traditionally acted as lenders, would need to change their business models to act as intermediaries. On that note, both ANZ Banking Group and Westpac Banking Corp, which originated the Visy deal, said they were willing to facilitate such loan arrangements, particularly as capital requirements were expected to make long term corporate lending even more expensive.

Linda Cunningham, head of debt at Cbus, which oversees more than $40 billion of assets, noted that many Australian companies had access to three to five-year funding from both local and offshore banks, and were often reluctant to pay more for longer-term funding.

“Once you go over 10 years, you get a big uptick in price. Companies are used to receiving three to five-year funding on a rolling basis. They want longer-term funding but are not necessarily prepared to pay for it,” she said.

Ms Cunningham also pointed out that not all companies were suitable candidates as long-term borrowers. Companies whose assets were short-term, such as retailers, might struggle, she suggested.

“It may not be appropriate to have longer-term debt because of the nature of the assets.”

Scott Barker, regional head of Asia Pacific debt investments at IFM Investors, said: “You need to match the funding with the business timeline.”

Other participants said they were optimistic about the future of the market and super funds said they were willing to collaborate so that they could provide large loans to capital-hungry companies.

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