Insignia Financial boss Scott Hartley has got what every chief executive of a flagging business dreams of: a bidding war between two – and possibly more – private equity suitors for the business he’s in the process of reinvigorating.  

Admittedly, it’s a pretty loose “war” – all offers so far have been indicative and non-binding – and while it’s some good news for long-suffering Insignia shareholders and, partly at least, vindicates the strategy Hartley has set out for the business, it does raise some questions about the growing profile of private equity in the superannuation sector. 

In some ways, it’s a turning of the tables. The growing appetite of super funds to invest in private equity (and private debt) has been well-documented; now we’re seeing private equity scouring the planet for attractive assets and turning up as investors in the $4 trillion Australian superannuation industry. 

The successful bidder for Insignia will follow KKR into the space, after the latter laid out $1.7 billion cash to buy a 55 per cent stake in Colonial First State from Commonwealth Bank late in 2021. 

The really attractive parts of both CFS and Insignia are not necessarily the superannuation trustee businesses. The scope to most meaningfully grow revenue and profit lies principally elsewhere, most notably platforms and asset management, which includes both superannuation and on-superannuation money. In comparison, trustee fees are small beer. 

But no aspect of businesses that private equity gets its hooks into can possibly escape the scrutiny of its private equity overlords, and it seems unlikely that they won’t look for ways to squeeze out extra profits from all operations to maximise return on the acquisition cost. 

CFS and Insignia manage around $90 billion and $180 billion of Australians’ retirement savings, respectively. APRA statistics show that at the end of September 2024, about $790 billion was managed in retail super funds, while industry funds managed about $1.4 trillion, about $1 trillion was held in self-managed super funds, and public sector fund assets stood at $737 million. 

The trustee divisions of entities such as CFS and Insignia are run for profit. And given the ROI expectations of private equity investors, a trustee entity owned by one could become a for-profit trustee on steroids. 

While listed (and unlisted, for that matter) for-profit financial services firms are fair private equity game, the trustee entities of profit-to-member funds, which are generally not-for-profit entities themselves, are protected somewhat from the sort of private equity interventions that for-profit players may experience. 

For example, the articles of association of United Super, trustee for the $94 billion Cbus Super fund, prohibit it from issuing “any invitation to the public to subscribe for or to accept subscriptions for any shares in or debentures of the company or to deposit money with or to accept deposits of money with the company for fixed periods or payable at call, whether bearing or not bearing interest”. 

It also provides that should any of the existing shareholders want to sell their shares, they must be offered to the other, existing shareholders – and who can and can’t be a shareholder is also clearly defined. 

Private equity 101 says you maximise profit from your investment by driving up revenue through price increases and driving down expenses by cost-cutting. You sell off unprofitable businesses, or businesses that can’t be improved, and then down the track you flog off what’s left. 

This is not to suggest that the services offered by trustee businesses owned by private equity will be degraded; just that the private equity playbook is to drive increased profits on whatever services they do provide. 

Increasing the fees charged by a trustee is potentially fraught: jack them up too much and there’s a risk they’ll impact the Your Future Your Super performance test. But private equity investors are nothing if not creative, and being of a performance-fee mindset themselves, it could be that they can cook up some innovative, performance-based trustee fees that have the potential to increase revenue and profit, without jeopardising YFYS results. 

Either way, it’s going to be fascinating and instructive to see how these PE-owned superannuation trustee businesses – and potentially others, later – track over time, and whether members of funds end up paying more or less to their trustees as the private equity investment works its way out. 

That said, however, members of profit-to-member funds are not immune from increased trustee fees themselves. The 2024 United Super annual report shows that cash receipts from trustee fees increased by almost 250 per cent, from $5.8 million in the year to 30 June 2023 to $20 million in the subsequent financial year, and the trustee’s cash reserves had increased commensurately. 

This is how Cbus has responded to the need to establish trustee reserves, and other funds have done the same. It’s not a move to boost profits per se, just a reminder that being a member of a profit-to-member super fund doesn’t mean trustee fees will always be lower than in for-profit counterparts. 

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