Institutional investors’ insatiable appetite for infrastructure assets is being curbed by limited deal flow, according to Paul Foster, head of infrastructure for Australia and New Zealand at AMP Capital.
Foster, who was a speaker at the recent Financial Services Council’s conference, described Australian superannuation funds as “rightfully agnostic” when it came to domestic versus offshore infrastructure assets.
“Money is not the problem – there’s plenty of capital – the issue is deal flow,” he said.
“Super funds have a fundamental duty to their members to maximise returns, at an acceptable level of risk, and if there are more compelling opportunities outside Australia, then that’s where the capital should flow. Capital has never been more mobile.”
Foster said demand for infrastructure assets was rising rapidly, citing three recent fully funded transactions including AMP Capital’s $525-million deal to acquire Brookfield Infrastructure’s 42 per cent stake in New Zealand’s second biggest electricity and gas distribution company, Powerco NZ Holdings; and the intense bidding war for the 99-year leases of Port Botany and Port Kembla.
The NSW Ports consortium, led by Industry Funds Management and including AustralianSuper, Cbus, HESTA, HOSTPLUS and Abu Dhabi Investment Authority subsidiary Tawreed Investments, won the $5.07-billion deal in April.
Competition frenzy
“Domestic and offshore sources of equity bid for that deal and a lot of capital was pulled together. Even the banks were vying to lend to that transaction,” he said.
“AMP Capital chose to sit on the sidelines for that deal because we believed it was a trophy asset with a lot of interest and capital chasing it, and that is not necessarily a recipe that leads to optimal returns for investors.”
Local investors faced increasing competition from offshore rivals for domestic assets, according to Foster, with six major Canadian pension funds currently active in Australian infrastructure, four of which have either established a full-time presence on the ground or are in the process of doing so.
“One of the challenges for governments looking to attract institutional capital into greenfield projects is that capital is both globally mobile and the owners of that capital are increasingly spoiled for choice between greenfield opportunities, privatisations and secondary – and in some cases tertiary – acquisitions of already privately held infrastructure,” Foster told attendees at the FSC conference.
“This pace of secondary and tertiary turnover of existing assets will accelerate in the next three years as the asset class continues to mature and a number of closed-end infrastructure funds raised globally in 2006-07 reach the end of their defined lives. This is problematic for governments competing to get the attention of institutional capital for greenfield/new projects given the procurement-model inefficiencies for long-term equity.”
AMP Capital’s inaugural Institutional Investor Report, released in May, found almost 40 per cent of global investors had imminent plans to increase their investments in direct and unlisted assets including infrastructure, private equity and real estate.
Over 45 per cent of European investors expect to allocate more funds to real assets in 2013, compared with only 18 per cent in Asia and 28 per cent in America.
Respondents signalled that an increased allocation to real assets would be sourced by a reduction in their equity portfolios not taken from fixed interest and cash.
AMP Capital plans to release an Institutional Investor Report every quarter.
