In­fra­struc­ture: Su­san Hely Su­per per­form­ers

Strong, re­li­able, long-term re­turns mean every­one wants a slice of the in­fra­struc­ture pie

Money Magazine Australia - - CONTENTS - STORY SU­SAN HELY

In­dus­try su­per­an­nu­a­tion funds have built their rep­u­ta­tion on be­ing a bit dif­fer­ent when it comes to in­vest­ing. Com­pared with their re­tail and self-man­aged coun­ter­parts, in­dus­try funds typ­i­cally hold a higher al­lo­ca­tion to in­fra­struc­ture, pri­vate eq­uity, hedge funds, start-ups and di­rect prop­erty projects. They took the plunge into in­fra­struc­ture 20 years ago – way ahead of other in­vestors – and it has proved to be a smart move, boost­ing their in­vest­ment re­turns.

In­dus­try funds on the whole hold 9% of their to­tal as­sets in in­fra­struc­ture com­pared with 2% for re­tail, 3% for cor­po­rate and 4% for pub­lic sec­tor funds, ac­cord­ing to al­lo­ca­tion fig­ures from the Aus­tralian Pru­den­tial Reg­u­la­tion Author­ity (APRA). SMSFs hold no in­fra­struc­ture, ac­cord­ing to tax of­fice statis­tics. “If you are an av­er­age in­vestor in Aus­tralia, you can’t get ac­cess to this stuff,” ex­plains Kirby Rap­pell, re­search man­ager at Su­perRat­ings.

The top 10 per­form­ers over the past three years to the end of April are all in­dus­try funds that are typ­i­cally big in­vestors in these as­set classes, ac­cord­ing to Su­perRat­ings. Typ­i­cally, in­fra­struc­ture has been a strong per­former in this low-re­turn in­vest­ment cli­mate, with its record low cash rates and plum­met­ing fixed-in­come yields. The Aus­tralian in­fra­struc­ture fund run by IFM In­vestors has re­turned 10%pa over the past three years while the in­ter­na­tional in­fra­struc­ture fund has done even bet­ter, adding 12%pa.

Around 32 in­dus­try funds set up IFM 20 years ago to gain ac­cess to in­fra­struc­ture be­cause there weren’t many in­fra­struc­ture ve­hi­cles. Af­ter sev­eral su­per fund amal­ga­ma­tions, the num­ber of IFM’s own­ers is down to 28 and the num­ber of global and lo­cal in­vestors has swelled to 221. IFM’s $37 bil­lion in­fra­struc­ture port­fo­lio has high-qual­ity in­vest­ments in a range of ports, toll roads, power com­pa­nies, wa­ter fil­tra­tion plants, aged­care homes, pipe­lines and air­ports, in­clud­ing Syd­ney, Mel­bourne, Perth, the North­ern Ter­ri­tory, Bris­bane, Ade­laide and Vi­enna and four in the Manch­ester Air­ports Group.

Su­per­an­nu­a­tion funds’ con­tin­ual con­tri­bu­tions mean that there is a huge weight of new money look­ing for an in­vest­ment home. “These funds have new cash flow

ev­ery year in the or­der of $800 mil­lion to $1 bil­lion. They can’t keep pil­ing into Aus­tralian eq­ui­ties,” says Rap­pell. “They need to look for new op­por­tu­ni­ties and di­ver­sify. The key chal­lenge is how to add to in­vestors’ re­turns.”

In­fra­struc­ture in­vest­ing suits the long-term na­ture of su­per­an­nu­a­tion, where con­tri­bu­tions sit in a per­son’s ac­count from their first job un­til re­tire­ment. Over that long term, the in­fra­struc­ture as­set pays an in­come stream. In the case of projects that are reg­u­lated, such as util­i­ties, the in­come is pro­tected, sta­ble and pre­dictable but not guar­an­teed. Other user-pay in­fra­struc­ture as­sets are more mar­ket driven.

In­dus­try funds like the fact that these as­sets pro­vide real jobs, of­ten for their own mem­bers. Cbus, a fund orig­i­nally set up for the build­ing and con­struc­tion in­dus­try some 37 years ago, says it has been able to pro­vide 70,000 jobs di­rectly and 50,000 in­di­rect jobs in its build­ing de­vel­op­ments. Kris­tian Fok, chief in­vest­ment of­fi­cer at Cbus, says that it is more de­sir­able to al­lo­cate mem­bers’ sav­ings to pro­duc­tive use in Aus­tralia to cre­ate jobs and build the econ­omy.

In­dus­try funds such as Aus­tralianSu­per and REST have been in the news re­cently for their in­vest­ment in en­ergy com­pa­nies. Aus­tralianSu­per bought a large chunk of Aus­grid, and REST bought a 99-year lease for a 50.4% stake in the NSW elec­tric­ity distri­bu­tion com­pany En­deav­our En­ergy. REST chief ex­ec­u­tive Damian Hill says this is a win for its 1.9 mil­lion mem­bers be­cause it de­liv­ers sta­ble, long-term cash flows in ex­cess of REST’s core strat­egy re­turn tar­get.

REST’s $2 bil­lion in in­fra­struc­ture in­vest­ments is man­aged by AMP Cap­i­tal and SIM. Its other en­ergy in­vest­ments in­clude Coll­gar Wind Farm (Western Aus­tralia), Pow­erco (a dual-en­ergy dis­trib­u­tor in New Zealand) and Capistrano Wind Part­ners (US).

But the highly com­pet­i­tive hunt for in­vest­ments yield­ing strong, steady re­turns means that in­fra­struc­ture has be­come ex­pen­sive. In­fra­struc­ture ad­vis­ers and ex­perts are in de­mand. Su­per funds are estab­lish­ing their in-house in­fra­struc­ture ex­perts as well as us­ing out­side ad­vis­ers. “Lots of in­vestors are com­pet­ing for ex­ist­ing as­sets,” says Fok.

The key chal­lenge is buy­ing at the right price, says Rap­pell. Aus­tralian in­fra­struc­ture in­vest­ments are lim­ited and groups such as

IFM have gone global to find op­por­tu­ni­ties. When ITR Con­ces­sion, op­er­a­tor of the In­di­ana toll road, filed for bank­ruptcy on more than $US6 bil­lion worth of debt, IFM picked it up. It high­lighted how many in­fra­struc­ture projects are funded with bor­row­ings and if the re­turns, such as the tolls, don’t pay down the debt, the in­vest­ment can fail.

In­fra­struc­ture car­ries high lev­els of debt as banks are pre­pared lend big amounts be­cause of the rel­a­tive sta­bil­ity. Garry Weaven, the chair of IFM, says the net debt-to-en­ter­prise value gear­ing ra­tios vary widely de­pend­ing on the sec­tor. “A PPP [pub­lic pri­vate part­ner­ship] with a state-based rev­enue stream might be at 75% lever­age, with a strong in­vest­ment-grade rat­ing. An as­set that has vol­ume risk, like an air­port, may be closer to 40% lever­age with the same re­sult­ing rat­ing,” he says.

Valu­ing in­fra­struc­ture can be tricky as the val­uer is be­ing paid by the fund. How­ever, Fok says Cbus em­ploys in­de­pen­dent val­uers that it re­views and ro­tates over time. He says APRA, the reg­u­la­tor, is mind­ful that su­per funds have ro­bust pro­cesses in place.

Some su­per funds have been burnt by in­fra­struc­ture, par­tic­u­larly by the illiq­uid­ity is­sues that come with di­vest­ing a big, lumpy, ex­pen­sive as­set. Some, such as Host­plus, the best-per­form­ing Aus­tralian su­per fund over the past three years, have in­vested in Aus­tralian and Chi­nese start-ups and en­trepreneurs. Host­plus, for ex­am­ple, has placed $350 mil­lion in ven­ture cap­i­tal. It has $150 mil­lion with Arte­sian, a seed-stage ven­ture cap­i­tal firm that has al­most 100 in­vest­ments, in­clud­ing later-stage ven­tures such as Fame and Part­ners, Swift, Hey You, In­sta­clustr, Clar­ity Pharmaceuticals, Crit­i­calArc, in­gogo, Jayride and Ga­murs. Host­plus’s other ven­ture cap­i­tal in­vest­ments in­clude MH Carnegie & Co, Bran­don Cap­i­tal, Black­bird Ven­tures and Square Peg Cap­i­tal.

Host­plus’s bal­anced op­tion is the top fund per­former and has re­turned 9.72%pa over the three years to the end of April 2017.

“There is no doubt that tech­nol­ogy has shaped our so­ci­ety and is per­va­sive in our ev­ery­day lives,” says David Elia, CEO of Host­plus. “In fact, tech­nol­ogy com­pa­nies have be­come the most valu­able com­pa­nies in the world. We be­lieve it makes sense to fur­ther di­ver­sify our port­fo­lio into ven­ture cap­i­tal and foster greater in­no­va­tion for Aus­tralia.”

Cbus has also ben­e­fited from the prop­erty boom. It holds $2 bil­lion in di­rect prop­er­ties that it has de­vel­oped. Over 10 years from 2006 to 2016, Cbus prop­erty has de­liv­ered re­turns of 15.5%pa and profit of $1.5 bil­lion. In 2016, prop­erty re­turned 24% to the fund’s bot­tom line and this year it is ex­pected to add a fur­ther 20%, says Fok.

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