Merger activity involving an estimated $1.5 trillion of superannuation assets is progressing as the pace of industry consolidation picks up, according to Catherine Nance, a PwC partner.
But despite the flurry of recent deals, Australia is still a long way off having the optimal number of superfunds, which Nance puts at between 30 and 50 funds.
Speaking at the annual ASI conference on Thursday, Nance, who has advised on 14 mergers of super funds, predicted that the number of super funds would be slashed from 180 to between 30 and 50 in the next three to five years. Further, the market will end up with five to ten mega funds – with more than $100 billion of assets and a similar number of small niche funds.
Merger activity has picked up over the past year or so, with a spate of recent activity including Aware Super’s proposed merger with WA Super, QSuper’s tie-up with Sunsuper, Tasplan’s marriage with MTAA Super and Cbus’ merger with Media Super.
Panellists agreed that funds must remove any barriers that may be delaying or preventing mergers taking place.
“We have seen some mergers almost fall over because of disputes over about who is on the board of the new entity, the management team, which fund receives the successive fund transfer and which administrative platform will be used,” said Nance. She calls some disputes hygienic – due diligence wrangles mostly – whereas others are deal-breakers and will block a merger.
“The greatest “deal-breaker” is disagreements on investment philosophy decision and products,” she added.
Damian Graham, investment chief at Aware Super said the fund had “an aspiration to be one of those large funds.” “We want to get to around $200 billion,” he said, adding that the fund had grown to $135 billion following the Vic Super, State Plus and WA Super deals.
Speaking of the Vic Super merger, Graham said it was a detailed and complex process but the two funds were aligned in values and purpose.”
“We agreed on what we wanted to achieve,” he added.
During the session, Graham told delegates that funds must be aligned on strategy, manager lineups and portfolio construction.
He also said mergers were more complex in volatile times. “More things have to be done and there is a propensity for more risk.”
The CIO told delegates that developing the ‘muscle’ to deal with organisational complexity would be integral to the success of future mergers.
The panel pinpointed lifecycle funds merging with non-lifecycle funds and unlisted investments as ‘problematic’.
Moreover, said Graham, the long-term benefits have to be substantial and justify the cost of the additional operational risk.
“You have to ensure the merger is in the members best interest and there has to be a cost-benefit for both parties,” he said, adding when big funds swallow smaller ones, it can be hard to show members the deal is in their best interest.
“The cost of a merger is around 10 basis points of the size of a fund,” Nance added, flagging this cost as a stumbling block for large funds looking to buy smaller funds.
“A few of us are talking to APRA about finding a different model for smaller funds moving into larger ones,” she told delegates.