“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.”