Time to open up infrastructure investment to SMSFs

First published in the Financial Review on 12 August 2020.

Its risk-return profile, capital growth, steady income and, in some instances, low risk, dovetail with self-managed superannuation fund income goals.

Infrastructure has been earmarked by the federal and state governments to do much of the heavy lifting in rebuilding Australia’s economy after COVID-19, with Treasurer Josh Frydenberg’s recent economic update continuing to commit a $100 billion pipeline to this task.

This commitment, when coupled with the need for patient capital to complement government spending, potentially opens the door to finding ways to allow self-managed superannuation funds to play a significant role in providing some of the capital needed for this type of investment.

These assets, which typically have a risk-return profile sitting between cash/fixed interest and equity/property, can offer capital growth, steady income and, in some instances, be relatively low risk, dovetailing with the retirement income goals of many SMSF trustees.

Other sectors of the superannuation industry have already benefited from infrastructure investment. Of the $2.7 trillion superannuation pool, large APRA-regulated super funds had $105 billion invested in Australian and overseas infrastructure at March 2020, with two superannuation sectors, industry and public sector funds, having the lion’s share at $91 billion (87 per cent).

By contrast, SMSFs have been largely excluded. Yet they offer a sizeable pool of capital with their funds under management predicted to exceed $1 trillion by 2029. As such, they are a viable and stable source of infrastructure funding.

Perhaps more significantly, more than 20 per cent of their assets are low risk (predominantly cash and fixed term) and could be available for these types of investment, especially if they generate stable dividend streams to help trustees meet their income needs, notably in retirement. Remember, too, SMSF investors are traditionally “sticky investors” who are comfortable with long-term investment horizons.


What’s required?

To open up infrastructure investment to SMSFs, what is needed is a liquid, unitised investment model that has a low cost of entry.

At present, SMSFs are extremely limited in investing directly in infrastructure because of high dollar thresholds and the illiquid nature of these investments. So projects needing capital structure their funding proposals to suit large institutions, in the process ignoring the significant pool of capital sitting in SMSFs.

It’s a vicious circle: SMSFs can’t invest because of the nature of the investments, so those seeking investment continue to tailor their investments to suit the big end of town.

Addressing liquidity issues, removing administrative barriers and lowering the cost of entry will provide the most significant challenges in allowing SMSFs to have these investment opportunities.

The capacity for SMSFs to be able to manage liquidity risk is paramount. The liquidity shock triggered by the economic impact of COVID-19 has been a wake-up call for even large superannuation funds (it’s been made worse by the $20,000 early super release option), especially for those funds focused on chasing returns by having a higher allocation of unlisted assets. So it’s imperative SMSFs can buy and sell in a liquid market.

The design of infrastructure investments also should be considered. For many SMSFs, this will probably mean brownfield assets (completed projects) that are income-generating rather than greenfield sites (projects still on the drawing boards). This would allow more conservative SMSF trustees, many of whom are in retirement phase, to be able to buy stable, long-term cashflow-positive infrastructure assets. For younger SMSF trustees, greenfield projects could be an alternative investment, offering the opportunity for capital growth over a long timeframe.

Whether it’s greenfield or brownfield, any investment would need to be unitised into smaller parcels ($25,000 units, for example) or lower-value products. Another option could be issuing small-scale infrastructure bonds. Developing a secondary market in these products would allow SMSFs to manage liquidity risk, especially when they are in the retirement phase, so they are able to cope financially with changing personal circumstances.

Infrastucture investments would also help SMSFs manage longevity risk in retirement. Their desire for control through direct investing and to use alternatives to cash and term deposits at a time of record low interest rates would be further enticement.

The benefits

The potential to rebuild the economy in a way that is truly sustainable and resilient through infrastructure has never been greater.

Opening up SMSF capital to infrastructure investments could allow capital to flow to projects that are now unfunded due to the increasing competition for infrastructure investment and the reluctance of large institutions to invest in smaller projects.

In addition, SMSFs would provide another source of long-term funding (debt or equity) to the traditional debt providers and equity investors in infrastructure projects.

Rebuilding our economy will need a collective effort, so excluding the $700 billion SMSF sector from investing in infrastructure makes little sense. That it’s an investment that would suit the retirement income strategies of many SMSF trustees should be kept front of mind by policymakers and infrastructure owners and developers.

Opinion piece written by
John Maroney, 
SMSF Association