The Future Fund has created a novel way to structure agreements with managers on two of its Australian airport investments to improve alignment and incentivise project management skills.
The move springs from the fund’s belief that the measurement of infrastructure performance is opaque and that Australian airports could be better managed.
Speaking at the ASFA Global Investment Forum in Sydney, Raphael Arndt, head of infrastructure and timberland at the Future Fund, outlined how the mandates would incentivize managers based on factors specific to a particular asset and within the manager’s control.
These include retail spend rates per passenger and the ability for the manager to work with the airport management team to deliver capital expenditure projects under budget and on time, rather than mark-to-market valuations which may be due to factors beyond the control of the manager.
It is understood that the two managers involved are AMP Capital which manages the Future Fund’s holding in Melbourne airport and HRL Morrison the manager of its holdings for Perth airport.
The Future Fund was able to set its own terms for the managers as it acquired the assets directly.
The initiative has sprung from concern at the lack of ready or appropriate benchmarks for infrastructure and thus the ability to judge clearly the ability of managers to add value.
In a hard hitting speech at the forum, Arndt said the infrastructure sector would struggle to reach its potential until it was more transparent about performance.
Such transparency would reveal how much returns were derived from bond yields, inflation expectations or GDP growth.
“What if you could assess whether your managers were adding any value over and above those, and other factors which you could buy much more cheaply and in a more liquid form?” he asked. “And what if you could talk to your manager about the proportion of their “skill” they were proposing to keep via their fee structure?”
The ability of the Future Fund to monitor the performance of managers this way is partly driven by information leveraged from other assets and from what Arndt described as “some of the best retail shopping centre and development property managers in the world”.
Arndt said in tenders his team would want to meet the people within the fund managers who had the expertise to ensure it could deliver on retail and capital expenditure performance.
“We found that many mangers had this expertise in house, but it was often sitting in a parallel real estate silo. We used the power of the tender to break that wall down. We agreed to pay for services provided on a fixed fee basis, but demanded transparency from managers on the cost of providing that service and their profit margins.”
The move is consistent with the Future Fund’s analysis of manager performance, particularly hedge fund managers, to evaluate whether they can make returns that demonstrate they can consistently apply skill and that are markedly different to beta returns.
Arndt added that based on the fund’s experience of managing airports around the world, he felt Australian airport management could improve.
“Who wouldn’t agree that airport retail offerings couldn’t be improved, car parking products be more sophisticated or the land bank be developed more effectively?” he asked.