Infrastructure: how super funds are changing the world

For most super funds and other  Australian institutional investors their  experience with the ownership of infrastructure  assets has, by and large, been a  happy one. Not the same can be said for  all such investors.  Each of the eastern States has at  least one disastrous toll road experience  for investors and many retail investors  in listed infrastructure funds were  taught a painful lesson by the GFC.  According to Mike Fitzpatrick, a  veteran of the asset class, much of the  recent criticism of infrastructure – and  certainly that part assigned to the  investment banks which packaged and  promoted many funds – is justifiable.  He predicts that the days when  investment banks fed transactions by  outbidding each other to win tenders  and then structuring the investments  into funds, often with long-term management  contracts in place, are hopefully  over.  Fitzpatrick, along with chief executive  John Clarke and non-executive  director Les Fallick, last year bought the  ANZ infrastructure business, which  Clarke had run since inception and had  about $1 billion invested in two unlisted  funds.

They have renamed the business  Infrastructure Capital Group (ICG).  Fitzpatrick, a Melbourne identity  due to his football history – a former  star player and current chair of the AFL  – was a key participant in the rise of  infrastructure as an asset class for super  funds in the 1990s and early 2000s. He  founded Hastings Funds Management,  which was well-supported by some  big super funds, and later acquired by  Westpac Banking Corporation.  Fallick, the chair and major  shareholder of the placement agency  Principle Advisory Services, is also  no stranger to the asset class. He was  general manager of the industry fundowned  Development Australia Fund in  the 1990s and has negotiated various  unlisted investments with super fund  clients in recent years.  His managing director at Principle  Advisory, Lachlan Douglas, is also a  shareholder in ICG.  Clarke, for his part, was the  founding chief executive of the ANZ  business, in which he held a minority  shareholding, from 2000. He launched  its Energy Infrastructure Trust in 2002  and the Diversified Infrastructure Trust  in 2006.

At the time of last year’s purchase,  the two trusts had asset values of about  $800 million for energy and $250 million  for diversified.  Clarke says that the energy fund  seemed like a contrarian investment at  its time of launching but has earned an  average of 20 per cent a year pre-tax  since inception and “recycled” between  $600-700 million of the investments.  “Early on, the period was characterised  by our building a credible offering  and a number of opportunities presented  themselves,” he says. “Institutions  were investing in toll roads and airports  but they didn’t have much in the way of  energy assets.”  The diversified fund was launched  when there was a lot of exuberance in  the market, Clarke says. The barriers to  entry for managers and investors looked  low but the investments were actually  quite complex.  “We weren’t prepared to buy  overpriced assets,” he says. “We never  participated in the PPP (public-private  partnership) market for that reason.  We always wanted to focus on investor  returns.”  Now, however, thanks largely to the  GFC, the market has changed and ICG  is prepared to look at some PPP investments  in a new light.