Super funds and private assets: a perfect marriage?

Morningstar convened the fourth of an ongoing series of round tables focused on the approach to private market investing with super fund executives representing over $350b AUM and four million members. This discussion occurred during the period of significant market volatility following the Trump tariff announcements, while bound by the continuing constraints of the three-year old APRA Your Future Your Super performance test.

Approaches to private market investment programs

Australian superannuation funds are among the largest institutional investors in the world, and private markets have become a critical component of their long-term investment strategies. While each fund has its own investment philosophy and constraints, common themes and diverse approaches exist across the industry, particularly in how these funds structure and manage their private market portfolios.

One dominant strategy among many large super funds is the emphasis on long-term investment horizons, particularly in infrastructure. These assets are economically durable and capable of generating stable, inflation-linked returns over extended periods. Many funds were early participants in major privatizations, such as airports and utilities, and continue to hold those assets today. This legacy reflects a strong conviction in the long-term value of real assets, particularly where cash flows are predictable, and governance rights are strong.

In today's digital landscape, Internalisation is a key trend, with a growing proportion of assets managed in-house. This approach allows funds to have greater control over their investments, reduce fees, and better align incentives. However, not all funds have the scale or capability to internalise across all asset classes or geographies. Many funds adopt a hybrid model, managing some investments directly while relying on external managers for others. When outsourcing, funds tend to establish strategic or “smart” partnerships with a small number of global managers, enabling deeper relationships, stronger alignment, and better access to high-quality opportunities.

Selectivity is a recurring theme in the management of private market relationships. Rather than spreading commitments across numerous managers and strategies, many funds concentrate their exposure with a few trusted partners. This focused model enables a more hands-on relationship, better oversight, and shared long-term strategic alignment. These partnerships are particularly valuable for funds that choose not to set up global offices with on-the-ground teams, allowing them to harness the global capabilities of their partners while maintaining lean operating models.

Private credit has also become an area of interest, particularly for funds seeking better capital turnover and recycling. The floating rate nature of returns was also very attractive in a low government bond yield world. Also, compared to traditional private equity, where returns may take years to materialise, private credit often provides more predictable income and shorter investment horizons. Some funds frame their approach as capital recycling rather than simple allocation—seeking to optimise every dollar of illiquidity across the portfolio, especially when inflows are modest or when managing liquidity for older member cohorts.

Conversely, some funds remain cautious in private equity, particularly given the longer capital lockups and fee structures. Strategies like secondaries - which invert the traditional J-curve by delivering early distributions - are increasingly attractive to those seeking faster capital returns and de-risked entry points. These strategies are used selectively to bring forward returns, manage risk, and improve capital efficiency, especially when funds are approaching or at the limits of their illiquidity thresholds.

Liquidity management is another constraint shaping private markets strategy. Funds with older membership demographics or higher pension drawdowns must model their liquidity with care. Some place internal stress limits on private market exposures to ensure resilience under adverse market conditions. This leads to disciplined allocation, where every new commitment must compete for capital, and existing holdings are constantly reviewed for divestment opportunities or tactical re-entry, often via the secondary market.

Across industry, there is also an increasing recognition of the importance of governance and collaboration. Investment teams are often structured to encourage cross-asset class collaboration and debate—real assets, private credit, and private equity are managed in a coordinated way, ensuring that opportunities are assessed through a total portfolio lens.

Overall, while strategies differ depending on fund size, maturity, and internal capabilities, common threads include a preference for long-term assets, disciplined capital recycling, selective partnerships, and hybrid internal/external management models. As private markets continue to evolve, superannuation funds are adapting their approaches to strike a balance between liquidity needs, member outcomes, and delivering sustainable, risk-adjusted returns.

Sourcing deals in a competitive landscape

As Australian superannuation funds expand their allocations to private markets, their strategies for sourcing investments have become more sophisticated and diverse. With rising interest in infrastructure, private equity, and real assets, the question is no longer whether to invest in private markets — but how to do it effectively. What is emerging is a spectrum of sourcing models shaped by fund size, internal capabilities, and risk appetite, each with its own advantages and challenges.

At the larger end of the scale, super funds with a strong reputation and established global presence enjoy a distinct advantage: they don’t have to chase deals—deals come to them. Trusted relationships with global asset managers, investment bankers, and co-investors mean they are often first in line for high-quality opportunities. This consistent inbound deal flow allows them to be highly selective. Their role in major transactions is not just as capital providers, but as preferred partners who can deliver certainty and scale.

These funds often take a strategic approach to managing the inflow of opportunities. By proactively communicating their sector preferences, target cheque sizes, and execution timelines to market intermediaries, they ensure a tighter match between opportunities presented and capital deployed. A fast “no” is valued as much as a well-informed “yes,” helping them maintain a reputation for clarity, decisiveness, and professionalism—traits that reinforce their position in competitive bidding processes.

On the other side of the spectrum, smaller or mid-sized funds—often still building out their private markets’ programs—take a more hands-on approach. For these funds, access is not automatic. Building relationships takes time, and many rely on specialist consultants or global advisers to expand their reach and provide due diligence support. Some funds supplement this by sending internal teams on global research trips to meet with dozens of managers face-to-face, ensuring that sourcing efforts remain deliberate, informed, and globally competitive.

Selectivity is even more pronounced in this segment. With fewer resources and a narrower capital base, only a fraction of reviewed opportunities makes it through the funnel. The process is cautious by necessity—one misstep with a poorly aligned manager can have long-term consequences. Some funds cite past challenges with legacy manager contracts as lessons in the importance of governance, flexibility, and alignment. As a result, newer partnerships are approached with a high bar for transparency and strategic fit.

A growing trend across the spectrum is the use of thematic investing to focus sourcing efforts. Whether it’s decarbonisation, digitalisation, demographics, or deglobalisation, many funds are aligning private markets investments with long-term structural trends. These themes help to drive allocations toward assets such as renewable energy platforms, data centres, telecommunications towers, and specialist housing. This thematic lens ensures investments are not only aligned with future growth but also resilient to macroeconomic shifts.

Structurally, sourcing models differ widely. Some funds have developed strong internal capabilities and make concentrated co-investments alongside a small number of trusted managers. Others maintain a more diversified structure, blending commingled fund investments with direct ownership and selectively partnering with global advisers. In both cases, the ability to control fees, improve governance, and scale exposure is a critical driver in how funds structure and source their private market portfolios.

Yet across all approaches, a few core principles remain consistent: strong relationships, disciplined filtering, and strategic clarity. In a market overflowing with opportunities, the true challenge is not access, it is judgment. As private markets mature and competition intensifies, Australian super funds are demonstrating that success lies in building the right partnerships, asking the right questions, and knowing when to say no.

Taking an active approach to private assets

As superannuation funds increase their exposure to private markets, many are moving beyond passive investing to adopt a more active ownership model—one that includes boardroom presence, close engagement with management, and influence over strategic decision-making.

In significant unlisted holdings, super funds are frequently securing board representation. These seats are not symbolic - they are filled strategically to ensure a blend of investment insight, governance expertise, and sector-specific knowledge. Often, one director brings financial and investment acumen, while others contribute operational, legal, or industry-specific experience. This ensures that the fund’s interests are represented across all major aspects of corporate oversight.

In majority-owned assets, some funds choose to appoint independent, external nominee directors with deep domain expertise - former industry executives, board veterans, or retired CEOs with backgrounds in property, aviation, finance, or digital infrastructure. These individuals act as an extension of the fund’s internal investment team, not only representing the fund on portfolio company boards but also supporting transaction due diligence, asset reviews, and strategic planning.

Maintaining alignment between the fund and its nominee directors is critical. To ensure consistency of voice and strategy, funds typically engage these directors before and after board meetings, hold regular check-ins, and stay in close contact when operational or governance issues arise. Directors are carefully selected through rigorous vetting processes, not only for their technical skills but also for cultural fit and alignment with the fund’s long-term approach to value creation.

Beyond board-level engagement, funds with meaningful stakes often interact directly with company executives, particularly on major investment programs or risk-related decisions. Early access to board papers, strategic proposals, and business plans allows funds to challenge assumptions, assess risk impacts, and influence outcomes before broader shareholder consultation begins.

Even where the fund is a smaller investor, active ownership remains a priority. This may be achieved through collaboration with fund managers, participation in investor advisory groups, or coalition-building with other co-investors. When managers lack a formal advisory structure, some funds take the lead in forming one to ensure governance standards are upheld and collective influence is maintained.

This shift — from capital providers to engaged stewards — reflects a broader trend in private markets, where influence, alignment, and strategic partnership are increasingly seen as essential to long-term investment success.

Balancing fiduciary duty and member values

At the heart of every superannuation fund is a clear mandate: to act in the best financial interests of members. For investment teams, this fiduciary duty defines decision-making from the top down—anchored in a rigorous assessment of risk and return. Regardless of industry alignment or stakeholder influence, the core focus is always long-term value creation.

That said, the profile and values of fund members - along with the sectors they work in - do influence how investment strategies evolve. For funds rooted in industries like health, education or mining, there is a keen sense of alignment between investment outlook and member identity. This can shape thematic preferences, such as prioritising energy transition in a just and measured way, or pursuing investments that support social outcomes without compromising financial returns.

Board members and investment committees are increasingly mindful of this balance. While industry stakeholders may attempt to influence investment directions - at times approaching board representatives directly - most super funds now operate with robust governance structures that prevent undue influence. “We might take the meeting out of courtesy,” one CIO said, “but it absolutely won’t compel an investment.”

Over time, investment decision-making has also been professionalised. Where once board committees played a hands-on role in manager selection or deal sourcing, today’s processes rely on internal teams with specialist expertise. Board members review, challenge, and guide—but they no longer lead individual investment ideas.

Some funds are also exploring how to integrate member values into portfolio construction. Impact targets, like a 1% allocation to high-impact investments, are being pursued cautiously, and only where risk-adjusted returns remain viable. “It’s taken time and discipline,” one executive observed, “but we’ve found opportunities we otherwise wouldn’t have.”

Ultimately, super funds continue to evolve, balancing a strong fiduciary framework with a deeper understanding of the members they serve—and the industries they represent.

Navigating new realities under the APRA performance test

The introduction of APRA’s Your Future, Your Super (YFYS) performance test has had a profound impact on how Australian superannuation funds think, invest, and manage risk. While the core purpose of the test—to ensure members receive value for money—is widely supported, it has reshaped investment behaviour in fundamental ways.

One of the most immediate changes has been the heightened emphasis on relative performance—both to the YFYS benchmark and to peer funds. This benchmarking lens now permeates strategic asset allocation and manager selection decisions. It has created a more constrained investment environment, particularly for private market allocations, where return measurement and benchmark misalignment present unique challenges.

In asset classes like private equity, for example, funds continue to target long-term outperformance—often aiming for 3–5% above listed market equivalents. However, because private equity is benchmarked to global small caps under YFYS, short-term deviations can create substantial tracking error. “You can be punished by timing,” said one CIO, noting the impact of a single bad year in an otherwise strong long-term strategy.

Real assets such as infrastructure and property, traditionally prized for their income and diversification attributes, now face additional scrutiny. These assets were once seen as portfolio stabilisers, but funds are increasingly nudged toward higher-growth allocations within these sectors to meet performance hurdles—sometimes stretching up the risk-return spectrum. CIOs are carefully managing the tension between building resilient, diversified portfolios and hitting CPI-plus and YFYS-relative benchmarks.

Some investment teams have responded by embracing a more opportunistic approach—assessing private market investments case by case, across property, credit, and equity, rather than sticking to rigid portfolio “buckets.” Others are experimenting with benchmark alternatives that better reflect the risk profile of less liquid assets, particularly in private credit.

Above all, the test has reinforced the need for discipline. “It’s not just about capital allocation anymore,” one executive noted. “It’s about ensuring every dollar is going to the best, most compelling investment opportunity at that moment.” While funds are adapting, the pressure to pass the test is real. “We missed failing by six basis points the first time,” another CIO recalled. “And we saw what happened to the funds that didn’t pass. That changes your mindset permanently.”

Active ESG: From screening to strategy

Across Australia’s superannuation landscape, ESG integration in private markets has evolved from exclusionary screening to a core strategic driver. Funds now view ESG not just as a risk mitigator but as a source of long-term value and return enhancement.

Initially led by screening and divestment, ESG is now seen as a thematic—on par with major structural forces like digitalisation. For some funds, ESG is embedded throughout the portfolio, supported by minimum standards, and detailed expectations placed on investment managers. Others take a hands-on approach, deploying ESG teams alongside investment professionals to engage directly with portfolio companies.

In sectors like timberland or infrastructure, ESG professionals may conduct site visits, assess safety culture, or work with management teams on improving sustainability reporting. Real assets like property and infrastructure benefit from clearer standards—green building codes and neighbour ratings provide visible benchmarks. However, integrating ESG into private equity and venture capital remains a challenge, given the relative opacity and variability of those markets.

Ultimately, ESG is treated as more than a compliance tool. It is a performance lens—integrated through diligence, governance engagement, and ongoing management—to help ensure assets are not just aligned with member values, but positioned for sustainable, long-term returns.

Leveraging data & technology

The increasing demand for transparency and data in private market investments has placed significant pressure on superannuation funds, and the challenges are especially pronounced when it comes to navigating the regulatory landscape and meeting APRA’s expectations.

Improving data systems to better manage unlisted market investments is a priority for many funds. One representative explains, “We’re in the process of bringing on newer systems into our process and portfolio management to uplift that.” This overhaul aims to streamline data across various portfolios, but the process remains a work in progress.

Similarly, many funds have undergone significant data uplifts, transitioning from spreadsheets to more structured systems for private market investments. While initial data is well-structured, there is still a need for more granular, sector-specific information.

Recent moves to custodians with better private market administration technology have improved transparency but increasing regulatory expectations on valuation practices present challenges. “You almost get to a stage where you have to go direct because that’s the only way you can meet that expectation,” one representative notes, highlighting difficulties in obtaining sufficient economics to challenge a general partner's valuation.

A critical issue remains the growing disconnect between private market valuation practices and the expectations of regulators, especially as public market fluctuations demand rapid adjustments. “It’s just that whole reactionary sort of response,” one fund member shares, reflecting the growing tensions between long-term financial models and the demand for short-term adjustments in valuations.

Ultimately, the industry may need to create a listed proxy benchmark for private assets to satisfy regulators' expectations and bridge the gap between private and public market valuations. “I think that’s where they’re going to drive us,” concludes one representative.

Learn more about our speakers here.

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Related: Private Credit: Growth, Defensive, or Something In-Between?