Thematic Investing is a Good Start for Australian Super Funds Investing in Venture Capital

I’ve just arrived back in San Francisco from visiting Super Funds and their asset consultants in Australia to the news that investors put $33.1 billion to work across all stages for U.S. and Canadian startups in the June quarter. That’s an increase of 16 percent from Q1 of 2018 and a whopping 43 percent increase from Q2 of 2017.

While there is healthy skepticism that mega rounds of venture capital will not last forever, you only have to look at the super-sized fundraising by Index Ventures announcing it has raised $1.65 billion for two new funds and Lightspeed Venture Partners closed its twelfth flagship fund with $750 million and its third “select” fund with $1.05 billion.

Part of our mission here at Frequency Ventures is to facilitate Australian superannuation funds making alternative investments in US based venture capital funds, ensuring the utmost transparency and proper governance. As  the super funds net inflow of contributions rise, so does the importance of diversifying beyond publicly listed technology stocks and technology index funds to get exposure to high investment returns.

With almost $100B of current venture capital being raised annually in North America, Australian super funds should not ignore investing into the US venture capital asset class.  There are several observations I would like to share based on my recent conversations with super funds investment teams and their asset managers.

1. Super Funds invest in Venture Capital to Reflect their Member Cohort.
One investment professional remarked to me that HostPlus invested in venture capital funds in Australia as part of a broader marketing proposition for their members, many of whom are younger working in hospitality and tourism sectors.  HESTA Super Fund, the national industry superannuation fund for people working in health and community services, recently allocated a further $40 million to the HESTA Social Impact Investment Trust (SIIT), which is managed by Social Ventures Australia who invest to obtain both financial and social returns. As I mentioned to HESTA in recent conversations, Social Ventures Australia might be able to help the dire homeless situation in San Francisco as access to affordable and stable housing is essential.

2. Thematic Investment Opportunities
Without getting too high on my tech soap box and handwaving the ‘amazing’ benefits of technology, I believe it is reasonable to say having spent the past 6 months talking in-depth with industry super funds in Australia, that their senior investment management teams are not fully aware  of the extent of transformative changes to their industry that technology is making. I appreciate it is difficult from Sydney or Melbourne to be exposed to what is going on at the cold face of innovation in Silicon Valley. Super fund investment officers are not engineers either.

While in Australia in June, I saw Tesla’s driving around, people very comfortable using the Uber app on their phone and this television commercial from MTAA Super. The logical conclusion to draw is that MTAA Super (a $10 billion national industry-based super fund that has proudly served the motor trades and allied industries for over 25 years) should be investing in autonomous vehicle technology as many of the motor mechanics and motor services members would be fascinated with this technology.

MTAA have an opportunity to leverage their member cohort and take advantage of being involved in US Venture capital funds that provide exposure to early stage investments in autonomous vehicle technology.

Over coffee last week at Coupa Cafe in Palo Alto with long time colleague David Ehrenberg, he mentioned that the 3.8 million truck drivers across the USA are at risk of semi-autonomous vehicle technology being developed by Uber, Google’s Waymo and others. Keith Nilsson, a venture capital colleague who was on the team at TPG who invested into the early rounds of Uber recently shared with me his investment into Peloton, a trucking automated vehicle technology company hard at work solving the two biggest challenges facing the $700 billion trucking industry:  crashes and fuel use.

There are many opportunities for Australian superfunds to find venture capitalist in Silicon Valley who invest thematically in sectors which correlate to their industry funds. In Sydney recently, I met with Cambridge Associates. Cambridge Associates represent LG Super, who  manage over $11 billion in superannuation assets for approximately 90,000 members, including  current and former New South Wales local government employees. Our conversation centered around different investment verticals that would appeal to their constituents. There is a lot of education that needs to take place with various super funds who traditionally feel more comfortable investing in commercial real estate funds and equities!

3. Defining a Venture Capital Strategy for Australian Super Funds
It is encouraging to have begun the dialog with Australian super funds and their asset managers. These conversations  help define what the investment opportunities in venture capital need to look like, which goes above and beyond aligning the cohort of members for Australian super funds with the investment thematics of US Venture Capital firms.

A real strategy for venture capital for Aussie super funds needs to be underpinned with knowledge of both the US venture capital market and Australian super funds objectives. Preparing investment memorandums that articulate the rationale, process and returns for Aussie super funds is a key part of  Frequency Ventures mission is to help hardworking Aussies get exposure to this technology investments.

4. Later Stage Co-Investment is a Strategic Requirement
It is apparent that Australian super funds can support the growing trend of venture backed technology companies to stay private longer, to generate more growth and profits without having to tap into the public market via an IPO.

The trend toward unicorn companies (valued at $1 billion plus) staying private longer (think AirBnB, Uber, SurveyMonkey) is an advantage for super funds who often want to write bigger checks as part of later stage preferred co-investments.  It is interesting to note that late state deals dominated the global venture capital market in Q2 of 2018, accounting for nearly two-thirds of total investment. Overall, investors put an estimated $57 billion to work in later stage rounds in the June 2018 quarter more than double year-ago levels.

Summary
In summary, Australian super funds are in the initial phase of their venture capital investments life cycle as limited partners with domestic Australian VC firms. They should be expect longer periods before liquidity when compared to US VC funds. We continue to help the Australian super funds understand the mechanics of the high growth venture capital investment, how to structure strategies around investing to share in returns being achieved by experienced Silicon Valley venture capitalists while providing compliance, governance and transparency.