First State Super and VicSuper launch merger talks to create A$117bn superfund

A merger would create country’s second-biggest superfund, behind only AustralianSuper and ahead of QSuper.

Superannuation funds First State Super and VicSuper have begun exploratory talks on a possible merger that would create Australia’s second-largest superfund with around A$117 billion ($83 billion; €74 billion) of assets under management.

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

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

This would place the combined fund behind only AustralianSuper in the list of the country’s largest superfunds. AustralianSuper had A$145 billion of AUM as of June 2018 according to the Australian Prudential Regulation Authority. QSuper at this point had A$103 billion of AUM, and would be Australia’s third largest superfund if First State Super and VicSuper were to merge.

Speaking to Infrastructure Investor in October 2018, First State Super infrastructure portfolio manager Mark Hector said 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,” he said. “First State Super was part of the [previous] 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 the coming years, and I would expect that First State Super, as one of the largest superfunds, would probably partake in that as well.”

VicSuper CEO Michael Dundon said: “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 said that initial talks had shown the funds were closely aligned in terms of culture and had much in common.

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

First State Super has built up a team, headed by Hector, to invest in infrastructure and agriculture. The fund has also made significant moves into land registry assets. In 2018, it acquired the state of Victoria’s land registry for A$2.06 billion, having acquired a stake in New South Wales’s registry the previous year.

Hector said last year that the fund had a target allocation of 5-6 percent in real assets, including infrastructure, water and agriculture. The allocation was just under 5 percent at the time.

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