Palisade Investment Partners is seeing increasing interest from large funds in social infrastructure, with director Roger Lloyd saying that the assets’ steady yielding, lower risk characteristics are attractive diversifiers.
This bullish outlook for mid-market infrastructure-asset demand comes as Palisade announces it had reached financial closure with the Plenary Group on an equity acquisition in the second stage of its Living Environment Accommodation Project (LEAP) through Palisade’s Australian Social Infrastructure Fund (PASIF).
The acquisition represents a 49.9-per-cent investment in the project and follows PASIF’s 49.9-per-cent investment in the first stage of LEAP in June 2011.
LEAP 1 was a $23.1-million fund, with its second incarnation topping $38 million. Despite the small size of the funds, Lloyd says that larger investors are looking more closely at social infrastructure linked to long-term government contracts.
“We have had a bit of contact with some of Australia’s larger funds and there is a feeling of ‘why haven’t we been doing this before?’ – it is like a watershed, and the light has gone on,” he says.
The latest social infrastructure fund is invested in 3000 accommodation units being built on 14 defence bases across Australia.
Capital costs are in excess of $800 million and the investors have a 30-year concession from the Australian Government.
The majority of debt finance is provided by Australian banks and superannuation funds.
Lloyd says that a long-term CPI-linked revenue stream is attractive to investors, with a typical yield as much as 600 to 700 basis points above Australian Government bonds.
The great LEAP forward
Palisade has set itself ambitious expansion plans and is adding new staff with the goal of reaching between $1.75 and $2 billion in assets over the next few years.
“I see no reason why over the next two to three years we wouldn’t have $500 million in social infrastructure assets, and at the same time they will be a balanced portfolio of green and brownfield assets,” he says.
LEAP 1 included investments includes the 229-bed Casey Hospital in Melbourne and the operation of nine police and courthouse complexes in six locations across regional South Australia.
Lloyd predicts that the size of social infrastructure assets will grow in the coming years, as it becomes a more mainstream part of the infrastructure holdings of institutional investors.
“Assets will get bigger, and more equity will be required and will get out of bed for it,” he says.
“I think there will be a huge demand for social infrastructure like this that is at the lower end of the risk spectrum for infrastructure.”
Opportunities in the space are already being realised by overseas investors. Palisade co-invested in both LEAP projects with Canada’s Caisse de dépôt et placement du Québec (Caisse), the country’s second largest pension fund, and Plenary Group. The three players struck an agreement and governance structure that lays the foundation for a long-term investment partnership.
Plenary Group recently announced that it has reached an agreement with Caisse to invest in five public-private partnerships in Australia, including the Melbourne Convention Centre.
The Canadian fund’s investments total $139.2 million across the five projects, according to the Plenary Group.
Lloyd says that foreign investors such as Caisse are seeing a number of attractive opportunities.
“There is more offshore money buying Australian infrastructure assets than there is Australian money,” he notes.
Since Palisade acquired the management rights to two infrastructure funds from Perpetual in 2008, the business has enjoyed exponential growth, with assets under management growing from $200 million to more than $700 million.
Assets are split between three funds covering core, social and regional infrastructure.
Its diversified infrastructure fund has core assets including airports in the Northern Territory, a power station in Western Australia and a wind farm in South Australia.
The regional infrastructure fund focuses on food, water, waste and energy assets, and includes regional livestock yards and a waste-treatment plant.