Super fund investment in infrastructure the opportunities and challenges

Mark Mudie, H.R.L. Morrison & Co

mark.mudie@hrlmorrison.com

Super fund investment in infrastructure –challenges

Morrison & Co 20 years of infrastructure investment experience

Morrison & Co • Founded in 1988 a specialist Infrastructure Investment Manager and Operator

Proven investment team • Over 40 investment professionals across offices in

- Overall team of 60

Institutional platform • A$6 billion consolidated AUM

• Founded Infratil in 1994, listed on NZX (IFT.NZ) & ASX (IFZ.AU)

• Individually managed accounts with a select group of large institutional clients (includes

Australian and New Zealand sovereign investment entities)

Individually managed accounts with a select group of large institutional clients (includes

Australian and New Zealand sovereign investment entities)

- Bespoke client investment strategies

- Customised relationship model

- Co-investment opportunities across client “club”

• Mandates cover global listed and private markets infrastructure investment

management

Outstanding performer • 17% after tax return over 20 years

Experienced owner operator

• Senior management from operational backgrounds

that are more complex in nature but provide better investment prospects over the medium to long term

Long term perspective • Track record of owning/managing infrastructure assets over a long period with many assets held for more than 10

years

Morrison & Co introductionof infrastructure investment experience

a specialist Infrastructure Investment Manager and Operator

across offices in Australia, New Zealand and Hong Kong,

in 1994, listed on NZX (IFT.NZ) & ASX (IFZ.AU)

Individually managed accounts with a select group of large institutional clients (includes mandates with the key

Australian and New Zealand sovereign investment entities)

2

Individually managed accounts with a select group of large institutional clients (includes mandates with the key

Australian and New Zealand sovereign investment entities)

strategies

investment opportunities across client “club”

global listed and private markets infrastructure investment, along with infrastructure asset

operational backgrounds with proven industry capability enabling investment in assets

that are more complex in nature but provide better investment prospects over the medium to long term

Track record of owning/managing infrastructure assets over a long period with many assets held for more than 10

1. Current investment climate

2. The $200bn opportunity

3. Investment considerations

Agenda

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We are reaching the final stage of a 30 year interest rate super cycleModern infrastructure investors have only operated in a world of falling interest rates

10%

12%

14%

16%

18%

10yr Nominal Bond Yield

10yr Real Bond Yield (Actual)

Margaret Thatcher becomes

PM

Real and Nominal US 10yr Government Bond Yields: 1953 to 2013

Source: US Federal Reserve, Bloomberg

(4%)

(2%)

-%

2%

4%

6%

8%

10%

1953 1958 1963 1968 1973 1978

Assoc. British Ports

BAA

We are reaching the final stage of a 30 year interest rate

Modern infrastructure investors have only operated in a world of falling interest rates

2nd Listed Infra Fund:

Infratil

Black Monday

Crash

Fed Chair Greenspan appointed

4

1983 1988 1993 1998 2003 2008 2013

9/11Lehman

Bros. Collapse

Sydney Airport

Port Botany / Kembla

Ports of Auckland

National Grid (UK)

Contact Energy

Perth Airport

BAA

Loy Yang PS

Port of Brisbane

1. Large pension funds and SWFs continue to grow

• Australian super funds have grown at 15.5% pa since 2000

- Total estimated assets of $1.84 trillion at 31 March 2014(1)

- Total contributions for the year ending March 2014 were $93.5 billion (~$8bn pcm)

• Growth and diversification of Asian SWFs into alternatives & Chinese SOEs

- Japan (GPIF) - $1.2trillion

- Malaysia (EPF) - $300bn

The amount of capital targeting assets is increasingPension & SWF fund assets are growing, and their infrastructure allocations increasing

- Malaysia (EPF) - $300bn

• “Strategic” objectives of Chinese SOEs

2. Allocations to infrastructure are increasing

• 72% of active investors in infrastructure still have less than 5% of total assets allocated to infrastructure

• Target allocations range from 5-10%

• Allocations are 10-15% amongst established infra investors in Australia & Canada

- Australian Super is at 14% (2)

3. Need to run to stand still is compounded by buoyant equity markets

1. ASFA, March 2014 Quarterly Superannuation Performance publication

2. Asset allocation factsheet, Australian Super website

38%

The amount of capital targeting assets is increasingPension & SWF fund assets are growing, and their infrastructure allocations increasing

Market $bn (2000) $bn (2012) CAGR

USA 10,141 16,851 4.3%

Japan 2,418 3,721 3.7%

UK 1,256 2,736 6.7%

Australia 275 1,555 15.5%

Canada 668 1,483 6.9%

Netherlands 441 1,199 8.7%

Total 15,199 27,545 5.1%

Largest Pension Fund Markets

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Total 15,199 27,545 5.1%

46%

Plentiful availability of capital – both equity and debt

“a $40bn+ week in infrastructure”

The result…New benchmarks continually being set in private market transactions

22nd April - QMLPortfolio of Qld toll roads

4 x committed financing bids submitted$7.1bn winning purchase price

28th April - East-West LinkGreenfield PPP with substantial construction risk

3 x committed financing bids submitted$6bn capex (according to Wikipedia…)

30th April – Port of NewcastleLong term lease for a landlord port business

27x EBITDA multiple$1.75bn winning purchase price

“Full” market valuations

3x increase in the value of Port of Brisbane in 3 years

continually being set in private market transactions

Driven by a combination of:• Improved business conditions (ie EBITDA growth)• Reduction in equity discount rates• Willingness of equity to fully value future growth prospects

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2.10

6.50

2010 2011 2012 2013

Acquisition price

1. Current investment climate

2. The $200bn opportunity

3. Investment considerations

Agenda

3. Investment considerations

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Australia’s pipeline is the envy (and focus) of the world

• 30+ State and Federal government assets earmarked for potential sale

• If all come to market, likely to draw in excess of $100bn of capital

- Power sector accounts for $70bn (driven by NSW and

• Driven by Federal Govt incentives = 15% of purchase price

- Capped at $5bn (meaning the first $33bn of asset sales/infra projects will be eligible)

- States have until June 2016 to agree the specific assets to be sold and the specific infra projects to be brought forward and invested in

$100bn of State and Federal government

assets

PPPs

• ANZ estimates PPP projects worth around $50bn will commence by

• These projects will be dominated by transport

• Having a profound impact on the structure of the Australian contracting market

• Following an enormous infrastructure build in Australia, we expect major energy companies will soon look to monetise the capital from these projects by divesting some non

• Live example: BG’s disposal of >$2bn capex LNG

$50bn of greenfield

$50bn of LNG/resource disposals

Australia’s pipeline is the envy (and focus) of the world

30+ State and Federal government assets earmarked for potential sale

If all come to market, likely to draw in excess of $100bn of capital

Power sector accounts for $70bn (driven by NSW and Qld)

incentives = 15% of purchase price

Capped at $5bn (meaning the first $33bn of asset sales/infra projects will be eligible)

States have until June 2016 to agree the specific assets to be sold and the specific infra projects to be brought

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ANZ estimates PPP projects worth around $50bn will commence by 2020

projects will be dominated by transport-related infrastructure in Australia’s larger urban areas

Having a profound impact on the structure of the Australian contracting market

Following an enormous infrastructure build in Australia, we expect major energy companies will soon look to monetise the capital from these projects by divesting some non-core assets

>$2bn capex LNG pipeline

1. Current investment climate

2. The $200bn opportunity

3. Investment considerations

Agenda

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• Empirically, regulated energy and water utility stocks have demonstrated a stronger positive correlation with bonds

since the on-set of QE

• Capital structures of these entities tend to be highly geared, increasing the adverse impact of rising interest rates

- The building block approach to maximum allowable revenues limits should provide a release valve at regulatory

re-set points

• Generally subject to greater regulatory risk as governments respond to cost

The impact of rising interest rates & additional capital will not be uniform across infrastructure sub

Bond-like infrastructure &

utilities

• Fundamental value creation, rather than bond yields, will drive investor returns in these sub

• Continuing improvement in economic growth will have a positive impact on these

greater volumetric exposure

• However highly geared will be susceptible to rising interest

Growth infrastructure

assets

• High barriers of entry to the primary market given the necessity of:

- Industry relationships

- Sector specific commercial, legal and financing skills

- Long bid & execution phases (12-18 months)

- Variable cheque sizes

- Bid costs

Greenfield

Empirically, regulated energy and water utility stocks have demonstrated a stronger positive correlation with bonds

Capital structures of these entities tend to be highly geared, increasing the adverse impact of rising interest rates

The building block approach to maximum allowable revenues limits should provide a release valve at regulatory

Generally subject to greater regulatory risk as governments respond to cost-of-living concerns

The impact of rising interest rates & additional capital will not be uniform across infrastructure sub-sectors

Fundamental value creation, rather than bond yields, will drive investor returns in these sub-sectors

Continuing improvement in economic growth will have a positive impact on these infrastructure sub-sectors given their

susceptible to rising interest rates (as per many pre-GFC transactions)

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High barriers of entry to the primary market given the necessity of:

Sector specific commercial, legal and financing skills

18 months)

Disciplined approach to origination, execution & management is critical to achieving objectives

Targeted origination activity

1

• Sub-sectors / geographies of focus

• Selective participation in processes

• Development of preferred access points

- Strategic JVs with industrial partners

- Investment in development platforms

• Listed vs private markets

• Key differentiator in sales processes

- Success requires deep analysis of individual companies’ long term growth drivers, operational improvement

opportunities, pricing power and ability to generate ancillary revenues

• Fundamental to investment returns

- Active management will be a key differentiator of performance

• Consortium formation / co-investors

• Investment managers

• Transaction advisers

Operational expertise2

Alignment of interest3

Disciplined approach to origination, execution & management is critical to achieving objectives

Strategic JVs with industrial partners

Investment in development platforms

deep analysis of individual companies’ long term growth drivers, operational improvement

opportunities, pricing power and ability to generate ancillary revenues

be a key differentiator of performance

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