Australian superannuation funds risk falling behind their international peers if they continue to pull back from private equity investments, according to Coller Capital.

Coller Capital, a firm that provides liquidity to investors who want to exit private equity investments early, conducts twice a year a survey of more than 100 institutional investors in private equity, also called Limited Partners (LPs).

It found that during the financial crisis the reduction of money allocated to private equity funds fell much more sharply in Australia than in other countries.

"There is a very obvious drop away in Australia in 2008, whilst the worldwide market was still going strong," Coller partner Jon Freeman said at the Australian Venture Capital Journal forum yesterday.

"Australia flat-lined in 2009, whilst the worldwide market came back just below their '05 heights," he said.

In 2010 and 2011, investments in Australian private equity funds rose slightly again, but it was predominantly foreign institutional investors that started picking up the slack in domestic funds, Freeman said.

"It seems that domestic superannuation funds moved away from private equity investments," he said.

Private equity has been commonly accepted by pension funds worldwide, but in Australia the market seems to have all but abandoned the sector, Freeman argued.

"[Foreign] LPs understand the private equity market. It is a well-established and robust part of their portfolio. It is something that provides returns to pensioners worldwide and it is something that they kept to provide those returns year in year out," he said.

"I think it is very important that the Australian superannuation industry doesn't move out of step with the way private equity is viewed pretty much universally amongst LPs worldwide," he said.

Part of the reason why Australian super funds have not allocated more to private equity is the experience they had with the investment in recent years.

"A lot of superannuation funds looked to international private equity and ramped their program up in the '05 - '08 period."

"So the party was going strong, everyone joined it and of course the financial crisis happened."

"If you were an Australian trustee, you were already slightly sceptical going into private equity in the first place, you would be very quick to say: 'I told you so'."

As the valuations of private equity investments fell sharply, super funds assumed that these levels were an accurate reflection of exit values.

"It is a slightly malicious assumption. It doesn't correspond with the return expectations that we are having," Freeman said.

Australia has also seen an increased focus on fees.

"You had the Cooper review, MySuper coming in and people looking at fees, and they used it as a stick to beat the market."

"There was no focus on net returns."

"It is interesting, if you looked at some of the net return experiences across the Australian superannuation funds private equity has been by far the best performer net of fees, so that it is not an argument that has been particularly logical," Freeman said.