Infrastructure and superannuation go together well. So well, that a simple online search of the terms turns up the phrases “If structured correctly, infrastructure is the perfect asset”; “stable, long-term cash flows… likely to provide attractive opportunities”; “a particularly attractive investment because of its potential to offer stable, long-term growth”.
It is believed it will weather any future GFC better than equities, match pensions and reward more than sovereign bonds. But some voices are questioning these comfortable beliefs.
The $7 billion paid for Queensland motorways and the $1.75 billion for the Port of Newcastle have provoked media alarm at the prices paid by Australian investors in these assets.
The desire to win the Queensland deal was intense and costly; Transurban, Kuwait Investment Authority and AustralianSuper beat off a consortium of Spanish told road operator Albertis, Hastings and the Dutch pension fund APG by under 1 per cent in its bid. A consortium that included IFM (partly owned by AustralianSuper) followed behind. Each will have spent several million dollars in year-long due diligence.
Alarm at the Port of Newcastle deal has been raised by the AFR over how much Hastings Funds Management and the China Merchants Group paid for what it is calculated to be an amount worth 27 times of earnings
Frontier Advisors has publicly expressed concern. It estimates demand at three times more than supply for larger deals and expresses a general fear that investors are increasingly willing to accept lower rates of return to get their hands on these “perfect assets”.
Further doubt is being raised by Access Advisors, which has written a paper questioning the widespread belief that infrastructure will protect investors from inflation.
I have spoken to two infrastructure managers about all of these concerns and the response is the same. They argue the media commentators do not understand the intricacies of each deal and the price to earnings multiples cited are woefully simplistic for monopoly assets with great inflation and earnings growth potential (at little cost). In answer to Frontier Advisors, they argue there’s more than enough pent-up supply of OECD country infrastructure to meet demand, and contest Access Advisors inflation warning too, on the basis of intricate points around debt funding. The managers also say that there are many types of infrastructure and not all are appealing to the mass of US pension fund and sovereign wealth fund investors that threaten to flood the market with liquidity. This basic riposte from fund managers could be summed up as ‘you do not understand our asset class’.
I am very much persuaded by this argument. Leading infrastructure managers are some of the most impressive people in fund management. They talk to governments, they have hands on involvement of assets and they are international deal makers with banks and sovereign wealth funds. However, it does beg the question; if infrastructure is so very hard to understand and explain, why are we making such simplistic assumptions about its virtues and reliability when talking to members of superannuation funds?