First State Super and VicSuper launch merger talks to create A$115bn superfund

Australian superannuation funds First State Super and VicSuper have begun exploratory talks on a potential merger that would create the country’s second-largest superfund with more than A$115 billion ($82 billion; €73 billion) in assets under management.

VicSuper said in a statement that discussions were in the “early stages”, adding: “We’re just exploring opportunities at this stage and neither fund has made any decisions to merge and there’s no obligation to proceed.”

If the merger proceeds, it would combine First State Super’s approximately A$75 billion in assets under management with VicSuper’s A$22 billion in AUM. The total AUM would rise to approximately A$117 billion when factoring in A$20 billion from StatePlus, the financial planning arm of New South Wales’ State Super, which First State Super acquired in 2016.

This would place the combined fund behind only AustralianSuper in the list of Australia’s largest superfunds and ahead of QSuper in third place. AustralianSuper had A$145 billion of AUM as of June 2018 according to the Australian Prudential Regulation Authority, while QSuper had A$103 billion of AUM.

Speaking to sister publication Infrastructure Investor in October 2018, First State Super infrastructure portfolio manager Mark Hector said that the fund was likely to participate in mergers as the sector began to consolidate further.

“We know that there are scale benefits to underlying members from some of the larger funds. First State Super was part of the [previously] largest merger in Australian super history with Victorian Health Super, so I would anticipate that there would be some more consolidation in the sector and more mergers in coming years, and I would expect that First State Super, as one of the largest superfunds, would probably partake in that as well,” he said.

VicSuper CEO Michael Dundon said in a statement: “Merging with First State Super would enable us to achieve greater benefits of scale, including access to a broader range of investment opportunities and an even greater ability to generate strong, sustainable returns over the long term.”

First State Super CEO Deanne Stewart added that initial talks had found the funds closely aligned on culture and that they shared a lot in common.

A merger would give the combined fund more clout to build up its exposure to unlisted assets.

First State Super has built an internal team to invest in infrastructure and agriculture, headed by Hector, and has made significant moves into land registry assets, acquiring 100 percent of Victoria’s land registry in 2018 for A$2.06 billion and a stake in New South Wales’ registry in 2017.

Hector said last year that the fund had a target allocation of 5-6 percent in real assets, which includes infrastructure, water and agriculture. It sat at just under 5 percent at the time of speaking to Infrastructure Investor.

VicSuper is also a long-time investor in infrastructure and agriculture. It is known to have a direct investment mandate with Palisade Investment Partners and has previously invested heavily in water entitlements in the Murray-Darling Basin.