The Royal Commission inquiry into financial misconduct across the major banks and financial institutions has turned its sights to AustralianSuper, Australia’s biggest superannuation fund, amid claims of toxic investments.
The company in question was a renewable energy company called Pacific Hydro, which would have gone under in 2014 if it was not for an emergency lifeline bailout from its owner, Industry Funds Management (IFM). The $200m bailout is now under scrutiny, as it emerged that IFM was under pressure from its own investors due to a write-down of the business, and Pacific Hydro would have been “technically insolvent” otherwise.
Such was the risk that Ian Silk, Chief Executive of AustralianSuper, wrote in a warning to his board that the write-down in question – valued at $685m – could be an “example of ideological investment” that would come at “the detriment of industry fund members”.
Silk also said that enabling this to happen once could easily set a precedent and create an “action that would affect all industry funds”.
With the inquiry into superannuation funds carrying on, the spotlight on Wednesday fell on IFM, which ended up in a fairly complex web of accountability. AustralianSuper and some other industry funds own IFM.
IFM owned Pacific Hydro for 10 years, from 2005 to 2015. AustralianSuper allegedly leaned on IFM to fix the troubled asset. The inquiry is calling into question exactly how much influence was involved.
Jason Peasley, who was Head of Infrastructure Investment at AustralianSuper at the time, confirmed to the Royal Commission that he was looking into the Pacific Hydro investment as early as 2011. Back then, the $643m stake that it had in Pacific Hydro worked out to a very noticeable 1.8% of its entire portfolio, larger than its stakes in three of the four big banks as well as BHP.
AustralianSuper therefore had a serious intent to get rid of the Pacific Hydro investment at the time, with a report labeling it lacking “both operationally and in investment performance”.
By 2014, the picture had gotten worse for the hydroelectric project, with the investment being classified as under “material deterioration”. Its value had plummeted more than $200m due to a number of important factors, including a reduction in the cost of electricity, the volume of power that it could actually generate, and the worth of its renewable energy certificates.
Launching a review itself in 2014, IFM then sought to do what it could to prevent the asset from being “technically insolvent”, which led to the funding package and the $200m bailout figure now under scrutiny.
A 2014 internal AustralianSuper memo said that IFM had been “unwilling to address the continued underperformance of the business”, while also ignoring “investor concerns” and how well Pacific Hydro was behaving as a “core infrastructure” portfolio asset.
After the news of the write-down broke, it saw the resignation of two board members and Pacific Hydro Director Garry Weaven. China’s State Power Investment Corporation bought Pacific Hydro a year later, enabling a pre-tax profit of $2.2bn.