Institutional investors are  allocating to real assets in smarter  ways. Knowing that airports, power  stations and gold provide risk and  return characteristics that do more  than hedge inflation, they are being  more selective in the search for the real  assets that best suit their long-term  needs. SIMON MUMME reports. John Dorrian had a seat at the  table when financial institutions  first bought into Melbourne  Airport, back in 1997.  “I think I’m the last person  standing from that deal,” he jokes.  Since then, infrastructure  investments have become more  popular among superannuation  funds, particularly industry funds.  Investors’ knowledge of the assets  has simultaneously deepened so  that Dorrian, Asia-Pacific head of  RREEF Infrastructure, sees clients  more as peers than as customers. 

“I can recall doing a  presentation for Ken Marshman  and his clients at JANA, 15 years  ago, on what infrastructure is. Now  we talk about what it means in  portfolio construction.”  This means choosing  infrastructure assets with risk,  return and liquidity characteristics  that complement their existing mix  of investments.  Dorrian says the view that  infrastructure represents generally  large, illiquid and defensive  investments is simplistic – there is  diversity among the behaviour of  toll roads, power generators, ports  and airports in different markets  and jurisdictions.  Richard Hedley, director of  RREEF Infrastructure and longterm  manager of NSW State  Super’s infrastructure portfolio,  says new or ‘greenfield’ assets can  chart return profiles similar to  private equity investments. In  contrast, assets commissioned by  governments, such as hospitals and  schools, provide a steady stream  of payments for investors, while  power and water utilities offer  protection from economic cycles.  Such differences mean funds can be  more selective about which pieces  of infrastructure they buy.

“What trustees are looking for  is a greater balance of these assets,”  Hedley says.  The RREEF Infrastructure  managers prefer to build  partnership-type relationships with  super funds, construct tailored  portfolios with “meaningful stakes”  in assets of between 15-50 per cent,  rather than manage a one-sizefits-  all product for many investors,  Dorrian says.  The large stakes give the  manager a say in the governance  and operations of the assets, such  as hiring and firing a CEO of an  infrastructure business.  “This gives investors greater  value than being an owner of a  small stake, which only lets them be  a passive investor [and] gives them  no governance rights, no ability  to control the direction of the  business.”  It can also be easier to exit an  investment if a fund is the single  owner of a large interest, he notes.  “More complex structures  mean you have less control – the  less stock you have in something,  the less control you have in the  ability to exit.”