A national harmonisation of the rules around infrastructure investment is sorely needed if more Australian super funds are to help build their own backyard, writes Middleton’s JIM BULLING. He is fresh from a bad experience trying to help a mid-sized super fund get set in the asset class.
The deficiencies of the infrastructure industry in its appeal to superannuation funds was starkly illustrated to me earlier this year when a client was looking to make a significant investment with a consortium in an attractive infrastructure project. The client was enthusiastic about the project and in preparing its bid paid a number of consultants to focus on various aspects of the due diligence required.
The first sign of a potential issue however was when the consortium’s organisers could provide none of the investors with clear details of their proposed participation in the deal, which included questions over exactly how much money each investor was going to contribute. While the rough big picture numbers could be estimated, the investors had no solid financials on which to justify their participation in the due diligence process for the investment.
The bottom line was that the trustee of the superannuation fund could not justify to members spending a large sum of money on the preparation phase alone. The irony was that if the trustee had completed the infrastructure deal, the fund would have achieved a better return than it has subsequently experienced by continuing with its established investment strategy in more conventional asset classes.
So how do we ensure these opportunities to invest in infrastructure aren’t lost in the future?
One of the mandated considerations for any super fund is liquidity, that is, they must match their investment strategy to their liquidity obligations, and this is difficult to be certain of when investing in infrastructure. In a wholesale unit trust, for example, super fund trustees can get a clearer understanding of liquidity. These statutory requirements applicable to super funds make them a little different to other institutional investors. Had this super fund client progressed the deal, it would have had to confront further issues about transparency and accountability.
Super funds need to report performance on an ongoing basis, which is critical in a competitive environment because members have the option of moving funds if they are unhappy about performance. Infrastructure in this regard is difficult to report, as up-to-date valuations are difficult to identify. Again this may make an investment by a super fund in a wholesale unit trust more attractive than an investment in infrastructure. There are some superannuation funds which are willing to take these issues on because they are better able to assess some of the unique risks involved in infrastructure.
