Competition law focus increases on superannuation funds taking a direct stake in listed and unlisted companies
The ACCC’s upcoming decision in the Port of Geelong case underlines the increasing competition law focus on superannuation funds as they take direct stakes in listed and unlisted companies.
The decision originally due this month was deferred pending “pending receipt of further information,” which suggests the regulator was poised to reject the deal.
Its proponents Tasplan and Palisades are now looking at alternatives including a new structure to reduce the obvious links with the rival Port of Portland. The $1.2 billion Spirit Super consortium bid for Geelong is 51 per cent owned by Tasplan, Tasmania’s largest not-for-profit fund and Sydney based infrastructure manager, Palisades Investments.
Palisades also controls 100 per cent of the Port of Portland which together with Geelong controls over 50 per cent of bulk commodity trade to and from Victoria.
Of note also is that, from November, the Tasmanian Government will move the Victorian port for its Spirit of Tasmania ferry from the Port of Melbourne to Geelong, which is one more reason for Tasplan to support the Geelong bid.
The big movers in corporate Australia today are clearly profit-for-member funds and they are increasingly active and flush with spending power.
A Parliamentary inquiry conducted by the House Economics Committee earlier this year investigated the issue.
One fund manager who declined to be named described the inquiry as a “Liberal Party stitch up job” but the presence of the now new assistant Treasurer for Competition Policy, Andrew Leigh, on the committee added some weight.
The change in Government will decrease the ideological concerns about profit for member funds but the competition issues remain.
Common fund ownership an area of concern
Former ACCC chief Rod Sims flagged common fund ownership as an area of concern.
The Parliamentary Committee, chaired by former Liberal Party powerbroker Jason Falinski noted “there is concern that a high degree of capital concentration can produce an environment in which these investors—sometimes referred to as ‘mega funds’—have significant power to influence the market, potentially to the detriment of both ordinary investors and the market as a whole”.
The Committee cited Oxford Professor Professor Martin Schmalz saying “if there are only two bakeries in town, competition authorities would not allow one to buy the other as that would create a monopolistic duopoly. If, however, an investor bought a 50 per cent stake in both, there would not be prohibitions on this, and now the shareholder can use their influence to direct management strategy away from investments in product improvement or market share acquisition.”
He added, “the outcomes are the same, but one approach is highly likely to be unlawful and the other beyond the scope of current competition laws”.
“The prospect that investors might seek to stifle competition is clearly concerning.”
The Committee said: “To date, though, there is a lack of evidence as to whether the concerns associated with capital concentration and common ownership can be validated.”
However, it added, “it is critical that our regulators be proactive in understanding the risks associated with capital concentration and common ownership now, so that we will not have to confront a larger issue in the future.”
Concern also growing in US
The concern is also growing in the US focusing on the big index funds BlackRock, Vanguard, State Street and Fidelity which managed over $16 trillion in assets.
One of these four funds is the largest shareholder for 88 per cent of firms in the US S&P500 Index.
Andrew Leigh and Adam Triggs released a paper last year focusing on Australian market noting “that among firms where at least one owner could be identified, 31 per cent share a substantial owner with a rival company. “
They looked at 443 industries that had common ownership including banking, explosives manufacturing, fuel retailing, insurance and iron ore mining.
They concluded “across the Australian economy, common ownership increases effective market concentration by 21 per cent.”
That is different from breaches of the law but underlines why concern exists.
Others argue it is a stretch to say just because one fund is a big shareholder in the top four banks the fund exercises some power over the banks.
Funds also keeping media businesses buoyant
Profit-for-member funds are helping keep media companies alive through big brand advertising spending, now default funds have given way to stapled funds.
They want to make sure their name is in your head when it comes to picking a super fund.
This brand awareness campaign is also keeping the industry in the regulator’s focus.
From a competition policy perspective, they are increasingly raising issues, not just because they are now taking big stakes in listed and unlisted companies in already consolidated industries like healthcare, through Healthscope and the HESTA-backed Ramsay bid, but many have common assets through their Industry Funds Management (IFM) membership .
Their interests are diverse with fingers in many allied pies.
The ACCC only gets interested when someone owns more than 20 per cent of an asset but the conspiracy theories will grow when the likes of $260 billion gorilla Australian Super (AS) starts buying five per cent plus stakes in all the big four banks.
It has noted, “when you get concentration in wealth management you could find that you have that common ownership of a small number of competitors, and that is where the problem arises.”
Push for consolidation increasing dangers
APRA is pushing for consolidation in the superannuation sector which only increases the dangers.
The industry’s size was noted by the ACCC which told the Parliamentary Committee. “the consolidated assets of managed funds was valued at $3.3 trillion as at 31 March 2021.This figure is the equivalent of about 144 per cent of the market capitalisation of all companies listed on the Australian Securities Exchange (ASX), or 174 per cent of Australia’s nominal gross domestic product (GDP) over the year to 31 March 2021.
According to the ACCC, the collective ownership interest of three major foreign-owned fund managers—Vanguard, BlackRock and State Street—was estimated to have represented 14 per cent of the issued capital of ASX200 companies in 2019.
APRA separately said, “regulated superannuation funds’ holdings of listed equities represented approximately 20 per cent of the market capitalisation of all ASX listed companies.”
Blackrock told the Committee “Any law reform based on an idea still subject to rigorous debate, is in our view, premature and inconsistent with the approach taken overseas. Further, this would abruptly impose direct costs and restrictions on Australians and their savings for an unproven consumer or market outcome.”
IFM, which is owned by several profit for member funds , also rejected the ownership concerns telling the Investment Magazine “the theory that common ownership causes anti-competitive outcomes has already been extensively debated elsewhere and shown to have significant flaws.”
It added “a number of competition authorities have concluded that the theory and available evidence does not warrant making changes to how they already police anti-competitive practices. “
Industry leader Australian Super with $260 billion under management is managing more assets internally and only wants a position in 20 to 25 Australian listed equities.
Airports most obvious example of cross holdings
Airports are the most obvious example of cross holdings with IFM controlling 85 per cent of Sydney, 25.2 per cent of Melbourne, 20 per cent of Brisbane and 77.4 per cent of Darwin.
The other 15 per cent of Sydney is owned by Unisuper.
IFM shareholder Australian Super also owns 5.2 per cent of Perth Airport and Unisuper owns seven per cent of Brisbane Airport and 49 per cent of Adelaide Airport.
Just as well Qantas has a stranglehold on Australian aviation because it would have noted while it was reporting $5.1 billion in losses for the two years ending June 2021, Melbourne was the only one of the big four airports to lose money last year amid the COVID shutdowns.
That is good news for its closely aligned investors.
The links between the airports which hit airlines with revenue sapping aeronautical charges raise at least eyebrows even if arguably they don’t directly compete.
The bottom line is the so called competition mafia, the lawyers advising on ACCC issues, now have a new lucrative line of clients in the form of profit for member funds.