Small industry superannuation funds might look to overhaul their ownership structures to become for-profit operators as part of an expected shake-up of Australia’s $2.7 trillion retirement savings sector, industry veteran Rob Coombe says.
Mr Coombe, executive chairman of Generation Development Group, an investment bond provider, said he expected dislocation in the financial services sector over the next few years to be greater than at any time in the past 20, with consolidation of the super sector a key part of the adjustment as funds with less than $20 billion of assets realised they were unviable.
“I think there will be massive consolidation in super. It might sound like water and oil but it may be that some industry funds will be looking to demutualise. It’s definitely possible because there is value to these things,” Mr Coombe said, adding that the exercise would enable funds to raise capital in order to re-invest in the business.
Unlike many of the former life and health insurance mutuals, most industry funds are technically owned by unions and employer groups, which may make changing the ownership model more complicated.
Mr Coombe argued that although retail super funds had been knocked hard by the royal commission, they were able to compete with industry funds in terms of fees and returns, if they were given a level playing field.
Generation Development, formerly known as Austock, has traditionally been an investment bond provider but it is looking to diversify. To that end, last month the company bought Ascalon Capital Managers, a funds management incubator from Westpac Banking Corp, Mr Coombe’s former employer. Rather than operate Ascalon in the same way, Generation Development plans to change the operating model into one that Mr Coombe argued should be more appealing to both the incubator and the fund managers.
For a start, Generation Development is only taking on two of the six Ascalon funds, as the managers of the remaining four, including Regal, take full ownership of their products by buying back the stakes that had been held by Ascalon.
Rather than retain minority equity stakes, as is the norm in the fund incubation sector, Generation Development will allow the remaining two fund managers – Morphic, an ethical fund, and Deep Water, a China long/short fund – to buy back their stakes and instead enter into a revenue sharing agreement. Mr Coombe said such an agreement would lead to a better long-term relationship between the incubator and the fund managers.
Under the model, any new funds that Ascalon signs up will receive seed funding, perhaps to the tune of between $50 million and $100 million, and will share their revenue stream with Ascalon, but with the right to buy back that revenue share at a given multiple in the future. Mr Coombe said that hedge funds were ideally suited to the model, because their higher fee structure allowed them to generate a profit with far fewer assets under management. While a traditional equity fund would need up to $2 billion of assets to be profitable, hedge funds could be profitable with assets of between $150 million and $200 million.
Mr Coombe said that although Ascalon would scour both Australia and Asia for new funds, the emphasis was likely to be on Asia.
“Ascalon has got a good track record of investing in absolute return funds in Asia,” Mr Coombe said.
The former Westpac banker argued that funds which could outperform an underlying market would become more popular with investors, while products that tended to track indices more closely would continue to suffer as investors dumped them in favour of passive funds.
“I don’t want to be in the middle ground,” Mr Coombe said.
Other areas that Generation Development is looking to move into are the savings side of super, as existing players leave the industry, and annuities, which cater to an ageing population in search of a secure income stream.
A fourth area of interest is life insurance. Generation Development is considering a model whereby it could partner with a foreign insurer, whose return on equity threshold was low. Generation Development could be the customer-facing side of the business while both players could benefit from starting with a clean slate.
In August 2017, Mr Coombe returned to the financial services sector, where he had worked for 30 years, after a five-year stint running Craveable Brands, a private equity-backed business that operates 600 fast-food restaurants, including the Red Rooster and Oporto chains.
In an article to be published in BOSS magazine on Friday, Mr Coombe discusses the challenges of switching industries, as well as the insights he gained.
“I don’t think I slept for six to nine months,” he told The Australian Financial Review this week. He said he was happy to be back in financial services.
“I’ve got 30 years of contacts. I know the value chain. I know all the acronyms,” he said.
BOSS magazine, out on Friday, takes an in-depth look at the challenges and lessons for executives who switch industries.