This article was first published in the Australian Business Review
There has been much focus on emergency funding of Australian business for good reason. However, as we now move to rebooting some parts of our economy the question arises: where will the cash come from to reboot?
I’ve previously raised concerns about Australia’s reboot risk, which is the risk of insufficient working capital in Australian businesses putting a brake on economic recovery. Many businesses have or will burn through the working capital that has taken years to build up. So where does that capital come from to rehire staff and ride out what is likely to be a bumpy two years ahead with unpredictable revenues?
I have been working with the private capital sector to understand the needs of Australian businesses.
Many businesses large and small have burned through their working capital. While businesses have survived on a faint heartbeat due to emergency government or bank funding and quick mothballing, when the business doors reopen where does the capital come from to turn the lights on, re-employ staff, pay for supplies and weather what is likely to be unpredictable cash flows for the next few years?
While one might hope government can and will step up again, I question whether that is a good thing for our mighty country or whether it is possible. Interest-free and other loans have already been floating around from government and the banks, but that can’t continue inevitably.
I think most of us would agree the balance sheets of Australia and the banking sector, while not in trouble, are looking pretty heavy at the moment.
So this is where the importance of Australia’s private capital industry comes in. Private capital is debt and equity capital that is not listed on a stock market. Private equity, venture capital and private credit are all forms of private capital.
There are not any official numbers to my knowledge of the exact size of the private capital sector in Australia. However, through my involvement in a large proportion of its fundraising activities I estimate debt and equity private capital is well over $100bn.
It involves both Australian and foreign fund managers and both foreign and local investors. In the private equity sector, it is not uncommon for 60 per cent or so of an Australian fund to be supported by offshore investors such as Canadian and European pension plans.
The private capital industry is where Australia can draw from to help reboot our economy. The reason is that the sector contains many of Australia’s brightest and most experienced minds in turning around and restructuring businesses for growth. Many have been through numerous economic crises. Their pedigree is demonstrated in their backing by the largest and most sophisticated investors in the world.
They have been so backed because of their consistent strong performance over decades. Quadrant Private Equity, for example, a few years ago was named as the 10th most consistent high-performing private equity fund in the world over the past 20 years. There are many other very successful managers. We have the talent, so how do we use it?
A rapid investor injection of funds to the private capital sector (both debt and equity) would increase the capacity of this talent to support a greater number of additional Australian businesses.
However, the sector faces a few problems in attracting rapid capital. Many institutional investors are technically “overweight” private investments because those investments have not gone down in value as much as listed equities. There have been criticisms that these private investments are not being marked down enough to match listed equity falls and they are opaque. While valuations are relevant to preventing value shifting from members moving to different investment options, they should not prevent further deployment that makes investment sense. Add to this the liquidity crunch those funds are facing as investors panic and move to more liquid strategies (plus the $20,000 early access scheme) and you have an important source of additional capital drying up, at least for the time being.
Superannuation trustees are required under the law to invest in a way that is in the best interests of their fund’s members.
Similarly, to how superannuation trustees are changing their investment approaches by taking into account climate change, it is time the trustees also look at whether it is not also in their members’ interests to increase investment in Australian businesses, now.
Their funding of private capital has the capacity to save those members’ jobs and families (remembering the harsh toll economic downturns have on the family unit) and create a healthy economy more quickly.
This type of investment takes progressive and brave thinking (some superannuation funds I have spoken to are considering this already). Thinking that is less reactive and more looking forward to how this will play out in the third and fourth quarters of the game. In the final quarters, human nature will involve members switching back into higher growth options as they chase returns. Add to that the ever-increasing size of Australian superannuation, and you have those funds that do not continue to invest having holes in their private capital portfolios in years to come and also having missed out on what will be compelling returns for investments in this vintage.
The case for Australian superannuation funds thinking progressively and opening their books to increased investment in Australian businesses seems to be nothing other than in members’ interests.
Nathan Cahill in a director of the Australian Investment Council and has two decades of legal and commercial experience in the funds management industry.