Australia’s maturing alternative assets industry attracts international and domestic investors, but unique challenges remain.
Daniel Trentacosta, Global Head of Private Markets and Change, and Patrick (Paddy) Kirwan, APAC Head of Investor Services, recently discussed the appealing Australian investment landscape and shared their insights.
Daniel, How has the Australian investment landscape changed over the years? How is the market evolving as the asset classes mature?
Daniel Trentacosta: The Australian investment landscape has undergone significant changes over the years, reflecting the evolution of the Australian economy and investors increasingly seeking diversification across asset classes.
Some of the key trends and changes in the Australian investment landscape include:
Diversification of asset classes
Australian investors have traditionally focused on domestic equities, property, and fixed-income products. However, in recent years, there has been a growing trend toward diversification of asset classes, with investors increasingly looking to international equities, as well as alternative assets such as private equity, real assets, infrastructure, and hedge funds. This is partly due to the explosive growth in superfunds, coupled with limited options to invest locally. As the Australian investment landscape evolves, we also see international investors seeking diversification across the Australian markets. Some of the largest investment managers in the world have operations in Australia or are allocating to Australia.
Emergence of superannuation funds
The continued growth and consolidation of superannuation funds has become a significant force in the Australian investment landscape. Today, these funds have larger pools of capital, totaling over $3.4tn in assets under management as of December 2022.1 The continued growth of superannuation funds has led to an increased focus on long-term investing, a growing interest in alternative investments, and a greater emphasis on environmental, social, and governance (ESG) factors. Over the last five years, superfunds have allocated more to private assets, with over 11%2 with a specific trend of investment in Australian (as well as global) infrastructure.
In recent years, ESG has become critical in investment decision making. Investors increasingly consider the impact of their investments on the environment and society.
What makes Australia such an attractive market compared with other countries or regions?
Patrick Kirwan: Overall, Australia’s stable political and economic environment, strong financial sector, rich natural resources, proximity to Asia, and diversified economy make it an attractive market for investors looking for stable and long-term investment opportunities. Investing in Australia has become increasingly attractive to both domestic and foreign investors in recent years as it offers a range of investment opportunities across multiple asset classes such as healthcare, mining, finance, property, and infrastructure. Australia has a stable and transparent political and economic environment, with a strong rule of law, an independent judiciary, and a robust regulatory framework. This stability provides investors with a sense of security and reduces the likelihood of sudden changes that could negatively impact their investments. Australia has a well- developed and highly regulated financial sector, considered to be one of the most sophisticated and advanced in the world. The sector is dominated by four major banks, providing investors with a range of investment opportunities. It is also worth noting that although Australia is considered a long way from other countries, Australia’s location in the Asia-Pacific region makes it a gateway to one of the fastest- growing regions in the world. The country has strong trade and investment links with the region, and its close ties with countries such as China and Japan have led to significant investment flows.
What role does Australia play in MUFG Investor Services’ global strategy?
Daniel Trentacosta: Australia is an important region for MUFG Investor Services for several reasons. Firstly, the country has a well-established financial services industry with a strong regulatory framework, making it an attractive destination for foreign investment. This creates a significant demand for asset servicing and investment management solutions, which MUFG Investor Services is well positioned to provide. Australia is also home to some of the world’s largest institutional investors, superannuation funds, and sovereign wealth funds. These investors require sophisticated and customized solutions, which MUFG Investor Services has a proven track record of delivering globally. We can leverage our global capabilities to offer these clients a full range of services across multiple jurisdictions such as fund administration, asset servicing (including debt services), banking, financing, FX services, and corporate and regulatory services.
Which strategy best creates alpha today in Australia amid a challenging global macroeconomic environment?
Patrick Kirwan: Creating alpha or generating returns over market benchmarks is challenging in today’s environment. One of the key changes we have noticed is managers want to outsource more middle and back-office functions to service providers to allow their teams to focus on their primary goal of generating alpha. The post-trade operational lift for firms is significant and if their infrastructure and teams are not designed or able to manage increased volume, this becomes a risk as well as an operational burden, taking them away from what they need to focus on: creating returns for their investors. By leveraging a service partner, firms can benefit from cost savings, improved efficiency, flexibility, and access to top talent.
Which sectors or verticals are the most promising in Australia’s private capital? Why?
Daniel Trentacosta: Australia offers many investment opportunities in areas such as healthcare, property, infrastructure, technology, education, and consumer goods and services, but it is difficult to say which sectors provide the best prospects. Historically, property and infrastructure have been the go-to asset classes thanks to their stable, long-term risk-return profiles. Having said that, in the post pandemic environment, the healthcare and technology sectors have substantial growth potential, specifically where innovative solutions to address the aging population, as well as demand for technology solutions that can be used to reduce costs and the reliance on human capital. In addition, cybersecurity, ecommerce, and cloud computing are opportunistic investments with investors seeking disruptive offerings.
What challenges are unique to Australia?
Patrick Kirwan: First, the uncertainty regarding future policy setting for superfunds can make it more difficult for them to make long-term illiquid investments. It is imperative that this is addressed to allow allocations to private markets to continue growing. Second, Australia has a limited availability of institutional capital compared with some of the other developed nations which can limit the amount of funding for private market investments. This makes it harder for Australian firms to compete on the international stage. Third, there is also a limited number of players in the market, meaning it can be competitive for deals and thus drive prices up. However, the opportunities in Australia’s growing private capital markets still present abundant opportunities.