Infrastructure: Susan Hely Super performers
Strong, reliable, long-term returns mean everyone wants a slice of the infrastructure pie
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.