Last month, Morningstar research revealed that the country’s two largest super funds, AustralianSuper and the Australian Retirement Trust (ART), now control a quarter of the Australian Prudential Regulation Authority (APRA)-regulated market, collectively managing more than $620 billion in assets .

What’s more, the study revealed that after a flurry of mergers, strong performance and high flows, the mega fund club has expanded to include Aware Super, UniSuper and Hostplus. Meanwhile, three additional funds – Cbus, Rest and HESTA – are on the verge of joining this elite group.

This rapid consolidation and growth of the superannuation industry has attracted the attention of both international and domestic institutions, including the International Monetary Fund (IMF), which expressed concern this month about liquidity risks in Australia’s supersystem.

Specifically, citing concerns about the funds' growing exposure to illiquid investments and the significant size of certain funds, the IMF warned that sudden liquidity requirements could lead to rapid, synchronized sell-offs of assets in domestic markets as funds struggle to raise money.

Similarly, a month earlier, the Reserve Bank of Australia (RBA) noted the growing importance of the country's super sector to the stability of the financial system due to its size and its links to banks.

Speaking on the matter to InvestorDaily this week, Morningstar senior analyst David Little said there are "certainly risks" given the growing number of assets that are spread across a more concentrated number of funds.

"Obviously we need to make sure that funds are looking at their liquidity management properly and regularly, taking into account things like demographics," Little said.

Reflecting on the IMF's concerns about the funds' exposure to investments such as private equity and credit, Little said that while there was "quite a difference in the unregistered exposure in the funds," it needed to be carefully monitored.

"During the GFC period, several funds had issues with their unregistered exposures and breaching allocation limits, but I think funds have certainly tightened their valuation processes to value their assets more regularly," Little said.

While he doesn't currently see "too many problems" in terms of the funds' ability to accommodate member redemptions, the analyst stressed there are still some concerns for financial regulators to monitor in the future.

"It is difficult to say how current this problem is, but it will obviously become more pronounced during a crisis. It's certainly something to watch especially as mega funds continue to grow. There is always an ongoing pursuit among industry funds to continue to consolidate, to build their economies of scale,” he noted.

Nearly a quarter of total assets in five major Australian super funds are tied up in illiquid investments, according to IMF data.

While he acknowledged that Australian regulations required funds to manage liquidity to accommodate changing clients, he said the growing share of illiquid assets raised the potential for disruption, with similar trends seen globally.

Earlier this year, Australia's biggest super fund wrote off a $1.1 billion investment in software company Pluralsight after the latter entered restructuring following a sharp decline amid rising interest rates and increasing market competition.

Although AustralianSuper is well-diversified and as such does not face significant hurdles in absorbing this loss, Mark Delaney, the fund's CIO, told the Australian Financial Review Super & Wealth Summit this week, the loss "still burns". However, the fund intends to continue investing in private equity, venture capital and also the technology sector in general.

When the error surrounding AustralianSuper's investment in Pluralsight became public, APRA Deputy chair Margaret Cole said the interaction between private credit and super funds was "opaque".

This opacity, she said, was a central driver of APRA's move to cross-industry stress testing to better examine all potential sources of contagion and gaps in the regulatory framework.