Local superannuation funds and managers could look to partner with Chinese state-backed investors to form bidding consortiums for Australian infrastructure assets.
Such partnerships would help local asset owners tap the capital they need to invest in big-ticket items, while reducing the risk Chinese buyers face of pouring time and money into launching a major bid only to be rebuffed on foreign investor rules.
The possibility of more collaboration between Australian and Chinese investors for local real assets was one topic of discussion among a panel of infrastructure specialists at the Investment Magazine Fiduciary Investors Symposium, held in the Blue Mountains, NSW May 15-17, 2017.
Over the past two decades, the Australian superannuation sector has become a major source of capital for the nation’s infrastructure building. But in recent years, low growth and low interest rates have fuelled the appetites of global investors for these defensive yield assets, pushing up prices.
Chinese institutions, in particular, are hungry for Australian infrastructure; however, their ability to outbid local funds is not always enough to secure deals.
Infrastructure Partnerships Australia director of economics and policy Nick Hudson said direct foreign investment out of China peaked in 2008, but has been recovering in recent years, with 2016 the second-biggest year on record. The second-biggest beneficiary of Chinese foreign direct investment, behind the United States, is Australia.
As a result, the Australian infrastructure sector is “very hot” and competitively priced, noted Justin Webb, who is a divisional director at Whitehelm Capital – a Sydney-based specialist infrastructure manager with $4.4 billion in funds under management and $17.37 billion under advice.
“But Chinese outbound investment into Australian infrastructure hasn’t all been smooth sailing,” Webb said.
Ausgrid and Kidman a warning shot
In 2016, two prominent bids by Chinese state-backed investors were rejected by Treasurer Scott Morrison, based on recommendations from the Foreign Investment Review Board (FIRB). The blocked sales, of the NSW electricity poles and wires business, Ausgrid, and the country’s biggest cattle producer, Kidman Station, have highlighted the opportunities for local super funds to team up with Chinese investors to take advantage of their deep pockets, rather than trying to compete with them.
“If you see China going after an asset, you do question whether you even go after it,” Hastings Funds Management investor director infrastructure, Andrew Fellowes, said.
“We have certainly seen plenty of examples where it was not worth going head to head, but negotiating a privatisation agreement with government is not easy…so there can be opportunities for us not to go head, where we don’t have to win solely on price.”
Hastings Funds Management is a $12.8 billion global infrastructure funds management firm. Hastings is a big investor alongside the Chinese in Australia, on assets such as the Port of Newcastle and South Australian energy transmission network ElectraNet.
Fellowes said that in 2012, when Hastings was competing against the China State Grid Corporation for stakes in ElectraNet, it was obvious that the Chinese Government-owned corporation had advantages of scale.
“In hindsight, the price might have been more reasonable than we thought at the time but it was certainly notable that we were competing against them,” he said. “They are one of the top 10 companies in the world and totally vertically integrated. It doesn’t move the needle for them to spend a couple of hundred million on an Australian transmission business.”
A partnership model
However, Fellowes said there were sound strategic reasons for the Chinese to take what was, for them, a relatively small stake in Australian assets.
“Where it does become important is when it is a chance for them to learn about our governance, about the Australian regulatory environment, and our practices to motivate and align management.”
Fellowes said Hastings’ relationship with China State Grid, while it may have begun as a competitive one, was now an evolving partnership.
“Since they [China State Grid] bought into ElectraNet, we have been forming a much stronger relationship with them,” he said.
Webb and Fellowes both predicted that the Chinese Government’s ‘One belt, one road’ policy – a program aimed at spending billions of dollars on improving infrastructure in nations bordering China – would have positive flow-on effects for Australia.
“One belt, one road creates a lot of opportunities for Australian firms, not just in infrastructure,” Fellowes said. “This is a huge strategic initiative for the Chinese Government. Australia isn’t directly a part of it but they [the Chinese Government] have opened it up for participation by individuals and companies with specific skills that they see assist them.
“This includes infrastructure procurement, banking and finance, agriculture and tourism, where Australian businesses can have world-leading best practice.”
The Chinese are open to joint ventures and partnerships, which have the advantage of reducing the risks associated with direct participation for Australian companies, Fellowes said.
“Particularly for local companies that have the sort of intellectual property that the Chinese can then take from those partnerships and deploy on their larger projects. We have seen that strategic overlay where Chinese investors are coming into Australia trying to buy assets because it fits into their strategic long-term goals,” he said.
“In the vast majority of cases, [the Chinese] are just extremely astute business people with very similar long-term goals to the Australian superannuation and pension funds that are trying to get a good return. They are very focused on yield, they want to have good governance, and a level of control, so they can make sure their money is managed well.”
Lofty valuations risk pushing out locals
IOOF head of managed fund research Miriam Herold said there was no doubt Chinese state-backed investors were “adding more competition” for assets in both listed and unlisted infrastructure, pushing up prices.
“Everybody is looking for good-yielding quality assets and, despite the FIRB, Australia does have a relatively low sovereign risk level and still a pipeline of good quality assets,” Herold said. “But there are some pretty high valuations being paid and I’m not sure things can progress much beyond here and still [have it remain] in the best interests of super funds to be putting more money into some of these lofty valuations.”
Herold noted the danger for commentary around that trend to take a “racist” tone.
“Much like in the unlisted property space, we are seeing price records set, but I don’t think you can particularly say it is the fault of the Chinese, because we are seeing similar demand from Canadian pension plans,” she said.