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Super funds call for intermediaries to innovate in impact investing

Dan Purves




The need for intermediaries to innovate to bring scale was a common theme running through institutional investors’ presentations at the inaugural Impact Investment Summit in Sydney during the closing days of October.

The Impact Investment Summit in Sydney brought together more than 80 international and domestic speakers, including entrepreneurs backed by Bill Gates, George Soros and Ebay founder Pierre Omidyar, to showcase strategies and discuss ideas of how to develop the market from an asset owner’s perspective.

Among the common stories of commercial success and flourishing business models at the Impact Investment Summit, one of the more sobering facts to emerge was that super funds did not view impact investments as having sufficient scale to warrant their interest.

Yet, they were expectant that intermediaries could develop options that will stir them, as it is estimated the market for impact investing will reach $32 billion domestically, with the global market hitting between US$500 billion to $1 trillion.

Frequently the point was made, by an assortment of representatives from super funds, that it was necessary for intermediaries to innovate, as no impact investment existed at an institutional grade.

Sophie Newby, investment analyst at First State Super, said because most impact investment opportunities existed outside the core competencies of superannuation funds, intermediaries were needed to enable investments in the space.

This was a point taken up by First State Super’s chief investment officer Richard Brandweiner.

He said it was very difficult for him to look at a $10 million impact investment – a social bond, for example – and work out its likelihood of success.

“This is the role for intermediaries, for fund of funds and other platforms that can channel large sums of money,” said Brandweiner. “As this ecosystem grows, as there are more experts that can actually form that assessment, that is going to make the process easier.”

UniSuper chair Chris Cuffe, who was also on Brandweiner’s panel, agreed, saying there is a definite role for a middleman.

He gave the example of UniSuper’s investment in green bonds backed by the World Bank.

“It’s a roll-up exercise that some government has then stood behind – in this case the World Bank – and it makes it sizeable for us,” he said.

Craig Shapiro, co-chief executive and founder of the Blue River Group (an intermediary established in 2015 to facilitate impact investment deals), argued that a big chunk of institutional investors’ portfolios were already impact, they just have not been categorised as such.

“It’s actually a philosophical issue around when you are making investments, what are you taking into account. It doesn’t need to be an alternative asset class,” Shapiro said, adding that impact investing should be an overlay, and not thought of as its own asset class.

For him, the key ingredients needed for more deals were collaboration and partnerships. For example, he saw the agriculture sector as having potential opportunities for super funds, particularly with off-take outcomes [an agreement to purchase portions of the producer’s future production] between other countries and large companies, providing food sustainability and security for Australia.

However, he was concerned that the size some super funds are now reaching could have a negative impact both for members and the wider economy.

“If industry super funds are so big that their minimum deal size is $100 million or $125 million, many of the opportunities in Australia, whether they are impact or otherwise, are not going to get off the ground because so much of the wealth is tied up in the hands of so few.

“You hear about the banks being too big to fail, but I wonder if the super funds are too big to succeed, because they can’t actually get enough diversity of products,” he cautioned.

For Christian Super, the super fund with the highest allocation (it has a target allocation of 10 per cent, but is currently at 8.4 per cent), impact investments are an integral part of its portfolio construction precisely because they deliver risk-adjusted returns via uncorrelated return drivers.

To help achieve this strategy, the super fund has piggy-backed on a number of global players and intermediaries, especially in equities in emerging markets, leveraging their expertise to help them gain depth of understanding.

Simba Marekera, senior portfolio analyst at Christian Super, said: “Unless we were convinced we could achieve that [commercial grade] level of returns, we would not invest.”

Brandweiner drew the analogy between the nascent impact investment industry and Erno Rubik, the inventor of the Rubik cube. When Rubik made his cube he did not know if there was a solution, but just assumed that it could be figured out.

“From my perspective, at this point I am very happy to assume that we can create market based financial returns and social outcomes,”

Brandweiner said. “And I want to assume that, because the prize is too big and the downside of not getting there is too much as well.”

“But it doesn’t exist, yet.”