Australia’s royal commission into its financial services industry today quizzed AustralianSuper on its investment in a renewable energy company, which had been one of the superannuation fund’s single largest infrastructure investments.
In a surprise move away from its previous focus on fees and misconduct, the royal commission turned its focus to Pacific Hydro, a renewable energy company owned by AustralianSuper and other superannuation funds.
The company, which has operations in Australia, Chile and Brazil, had to be bailed out by investors in 2014.
The AUD140bn (€89.4bn) AustralianSuper was the first industry superannuation fund to appear before Royal Commissioner Kenneth Hayne, who had called for internal reports on Pacific Hydro ahead of meeting.
The questions were put to Jason Peasley, head of mid-risk assets at AustralianSuper, who oversaw infrastructure investments from 2011 to 2016.
He said the investment in Pacific Hydro – which was made through the Australian Infrastructure Fund (AIF), managed by IFM Investors – represented 3.55% of AustralianSuper’s entire investment portfolio by the middle of 2013.
Counsel assisting the royal commissioner, Albert Dinelli, quizzed Peasley on concerns over the deteriorating performance of Pacific Hydro from 2014, when returns had gone from reasonable to “mediocre”.
A report by AustralianSuper’s CEO Ian Silk at the time said that, without shareholders’ support and a cash injection of AUD200m, Pacific Hydro was technically insolvent.
The inquiry was told the situation at Pacific Hydro came to light following an IFM Investors review of the company.
Peasley said investors in the energy company also had exposure through a subordinated note facility.
He told Dinelli that the concern was over the size of both the current and prospective risk profile and return volatility associated with refinancing of subordinated notes and a restructuring proposal for the business.
“These factors will materially alter the way in which our investment in Pacific Hydro is to be held,” he said.
Peasley said the fund had several conversations with IFM Investors to raise its concerns about the fund’s performance.
“We don’t necessarily sit passively if we have a particular view,” he said.
“We had a view that we felt reflected the best interest of our members and we felt a duty to engage with the manager and convey those views accordingly in an attempt to seek some sense of alignment or outcome that we felt was in the best interests of our fund members.”
Peasley said the subordinated note refinancing went ahead, but with other providers, and the ownership remained within AIF.
He explained that the investment had devalued because of a deteriorated outlook for electricity prices and issues with output.
He said there were also a number of external factors related to the value of renewable energy certificates which these assets generated and were of value and could be sold on the market.
“There were also changes in Chile to tax policy that had adverse impacts on the owners,” he said.
Pacific Hydro had required a funding support package, including a AUD200m cash injection.
The commission heard that AIF successfully disposed of Pacific Hydro in 2016 on terms that delivered pre-tax proceeds to the fund of AUD2.23 billion.
Ian Silk, the CEO of AustralianSuper, is due to take the stand tomorrow as the royal commission continues its fifth round, focusing on Australia’s AUD2.6trn superannuation industry.