Despite having the world’s fourth-largest pension pool, the share of superannuation allocated to VC has halved in recent years. Given the dominant role of super in the Australian investment landscape, this is a problem.

It isn’t because Australian VCs aren't performing well. On the contrary, they are punching above their weight, with Australia ranked number one in the world for unicorns created per VC dollar invested.

We need to do more to back our most innovative businesses — not just to accelerate productivity growth, but also to deliver higher returns for the millions of Australians saving for retirement. This is one of the issues I am pursuing at the Economic Reform Roundtable, alongside comprehensive tax reform.

This isn’t a simple problem to solve, but there are two clear places to start.

First, we need to evolve super rules that discourage investment in innovation. The Your Future, Your Super (YFYS) performance test — which closes a fund to new members if it underperforms an index for two consecutive years — has helped lift returns by targeting and removing underperforming funds.

But it discourages longer-term investments such as venture capital, where funds typically have a 10-year life and little growth in the first few years while investments are being made.

Alternative asset classes where a single benchmark is not obvious, including clean energy and housing, also risk missing out.

Similarly, ASIC’s RG97 fee disclosure regime aims to protect members from high fees, but by focusing on gross rather than net returns, it discourages investment in asset classes that may carry higher fees but deliver stronger long-term performance. Venture capital is one of the casualties, as is housing.

While these rules serve admirable purposes, they are a barrier to investment in our most innovative firms. And while underperforming funds have cost super members, so too has their lack of access to the superior returns of high-performing asset classes such as VC. The private equity–VC sector has a 10-year average return of 15% compared with 7% for the ASX 300. A 2023 Treasury review of YFYS found the current settings encouraged “benchmark hugging”.

We need to acknowledge and address these challenges by evolving YFYS benchmarks and refocusing regulations such as RG97 on net returns rather than gross fees. Removing frictions on institutional investment in VC will be even more important if the government proceeds with taxing unrealised gains on super balances above $3 million.

The second improvement is to utilise existing investment vehicles to unlock venture capital. Regulatory changes are necessary but won’t be enough on their own. We also need an institutional response.

The scale of Australia’s $4 trillion superannuation system should be an advantage, but funds often won’t write cheques under $100 million. For a VC raising its first or second fund of $50 million or even $100 million, super’s scale can be a barrier to investment.

Other countries have used state-backed investment vehicles and fund-of-funds structures to help solve this problem.

Israel’s remarkable success in fostering a thriving technology and startup ecosystem owes much to the Yozma program, which seeded its world-leading VC sector. The British Business Bank has helped grow the UK VC market to twice the size of Australia’s as a share of GDP.

Australia already has several state-backed investment vehicles, but their current approach leaves a gap in funding for higher-risk, longer-term capital such as VC.

One option would be to re-orient government investment vehicles, such as the National Reconstruction Fund (NRF), to help catalyse Australian VC.

For example, the NRF could use fund-of-funds structures to seed new and emerging VC funds and help crowd in super as part of the process. This is a common approach overseas and avoids crowding out the private sector.

Challenges around access to finance don’t stop at venture. The banking sector’s credit shift from business to mortgages is also a major issue, particularly for SMEs, and we need to drive more investment into our largest firms.

But if we want to grow tomorrow’s giants, we must support the innovators and disruptors starting and scaling today.