Investing in Infrastructure

Investing in Infrastructure

Investing in Infrastructure

Have you ever wanted to know more about infrastructure? 
What infrastructure actually is, why AustralianSuper invests in infrastructure and how decisions are made about what to invest in?  

Then watch as our Investment Managers Suzanne Findlay and Nik Kemp from AustralianSuper’s Infrastructure Team explain:  

  • what infrastructure is
  • the types of assets held in our portfolio
  • why infrastructure is such an important asset class
  • how we’re investing directly in infrastructure, and
  • why this benefits our members.

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Video transcript

Suzanne: The umbrella term "infrastructure" covers a range of real assets that provide essential services to the community. So it's things like utility companies, water, electricity, or gas; transport assets, airports, ports, or toll roads; and social assets like schools and hospitals....
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A lot of infrastructure assets were originally owned by governments because they provide an essential service. However, over the last couple of decades, governments have been selling off assets and one of the buyers have been superfunds. It actually means that the ownership of these assets that provide a service to the community are still owned by a lot of Australians. In fact, they're owned by the majority of Australians, albeit in a different way.

The balanced and other premixed options in AustralianSuper are comprised of a range of different types of asset classes. There's equities which are sort of higher-risk, higher-return and then fixed-income which is lower-risk, lower-return, and infrastructure and property really fit in the center of that. What's really attractive to us about infrastructure assets is that the cash flows or the earnings of those assets is relatively predictable, and that comes back to the type of assets that they are. Even when the economy is a bit slower, people continue to use electricity and water, they continue to drive along toll roads.

When we construct the infrastructure portfolio we try to get a group of assets that has a different mix of drivers. So it might be across different countries who will have slightly different economic conditions or across different types of assets, so they might be a GDP driver or an inflation driver or a regulatory driver. And what that means is when they're put together in the portfolio we end up with a more constant return than each individual asset.

Nik: In the past, we have invested through fund managers and about two years we made a strategic decision to start investing directly into large infrastructure projects which has allowed us to increase the scale and the size of the investments that we're able to make into the infrastructure projects.

The main benefit we get through investing directly in infrastructure is the fact that we're able to hold the discretion of when to make the purchases of the businesses and similarly also when to sell the businesses when the right time comes. Also through going directly, we're able to hold a level of governance rights which means that we're able to put board members on to the boards of these companies and allows us to have a level of influence over the way the business is actually run. I think a final benefit that we get through investing directly is that it's considerably cheaper to do it that way than if we were to do it through a fund manager or through an intermediary.

It really depends on the type of asset and the particular opportunities to how we do become aware of it, and really there's two main buckets as to how it comes to us. The first, such as the Queensland Motorways or the New South Wales Ports transactions, which are large, fairly public privatization which comes to us directly from the government sources. The other, and more discreet way that transactions are brought to us, are the off-market ones and in a way they're potentially more interesting.

Generally what we're looking for are core infrastructure assets. They are a number of key attributes that make up a core infrastructure asset to us such as the asset being unlisted. The key importance of it being unlisted is that it means that it doesn't fluctuate on a day-to-day basis such as the equity markets or the fixed-income markets. We also look for assets that are monopolistic, so assets that have very low competition or high barriers of entry.

The infrastructure assets we look for need to be essential services, so they need to ensure that throughout the long 30, 40, 50-year duration that we want to hold these assets for, they won't become stranded assets and fall out of use over that period. We look for businesses that have very high margins and are very capital-intensive. So we like to reduce the operating risks that underpin those business as much as possible. And finally, we like to look for businesses that have relatively low gearing and reduces the financial stress risk that is associated with them.

Not only does AustralianSuper have the ability to provide considerable volume and quantity of investment funds into these particular assets, we're able to invest across the capital structure from the equity side right through to the debt required in these investments. That comes from our one-fund approach. The way we approach these is not just infrastructure equity, but we actually look at the equity of the sub-debt and any debt that might be required. As an example, if we look at Queensland Motorways, we invested directly into Queensland Motorways as an equity participant, but on top of that, we invested directly into TransUrban who used the proceeds of that to make their investment into Queensland Motorways.

The main challenges that are involved with investing directly into the infrastructure space, actually the scarcity of assets, we like to make sure that we have a disciplined approach to what we actually invest in and we're saying that there's probably not enough opportunities or, more to the point, we could invest in more opportunities if they were to present. The other challenge that we're finding is that competition from other superannuation funds and Sovereign Wealth Fund is starting to come into this sector. What that means is those few opportunities that actually exist are having more and more bidders that are trying to invest in these assets.

So when we put all that together, what is particularly important to us is to make sure that when we do look at the opportunities that are there, we remain disciplined and we make sure that the value that we put on these assets is the fair value and they're in the best interests of our members.

Suzanne: Historically, infrastructures delivered good high returns as part of the premixed options and also helped to reduce the volatility. Looking forward, we expect it to continue to provide an important role for AustralianSuper.

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