Superannuation funds are shifting away from traditional infrastructure assets such as sea ports, toll roads and airports. The search for more diverse income streams has them investing in fishing fleets, car parks, retirement homes, and land registries.
A panel discussion at Investment Magazine’s Infrastructure and Real Estate Conference, held in Melbourne on Tuesday, concluded that these broader deals could still be characterised as infrastructure if the asset generates steady long-term cash flow.
Hostplus head of infrastructure Jordan Kraiten argued there was no limit to the classification for infrastructure, and added that the classification was more about the risk/return relationship and depended on the broader portfolio.
“I think the funds are pushing some boundaries but I think we should not get overly caught up over whether an asset has specific characteristics,” Kraiten said.
First State Super head of income and real assets Damien Webb said avoiding poles, wires and ports prompted the superannuation fund to broaden its definition of infrastructure but added that decision had protected the fund against buying some highly priced assets where competition risk was significant.
Webb explained that First State had focused on public and private partnerships (PPPs), social infrastructure and land registries. Specifically, he noted that land registries were an essential service and a monopoly with high operating earnings and margins.
“Although our portfolio has probably changed over the last 10 years and one could say it looks riskier, I guess risky only applies if an asset is managed inappropriately or priced inappropriately,” he said.
Webb does not think the additional infrastructure assets make a compelling case for re-characterisation of the asset class. To him, it comes back to the fundamentals. “It is not so much what the title is; ultimately, what classifies infrastructure is whether the cash flows are stable,” he said.
IOOF Holdings alternatives portfolio manager Ray King also dispelled the idea that the definition of infrastructure markets was changing. That said, he told the panel that the composition of the industry would be reshaped through investment in renewable energy.
King, who is a long-serving fund manager, also took issue with the notion that this expanded set of projects was riskier. Based on fundamentals, he said, the very early infrastructure deals done in Australia looked similar to those being done today.
Back then, he said, valuations were carried out using discount-cashflow modelling on a long-term horizon and that the discount rate used came under heavy scrutiny.
“About 80 per cent of asset analysis was based on looking at different revenue scenarios,” he said. “When we had problems in the industry in the global financial crisis, a lot of it was caused by infrastructure managers focusing on a base case and bidding on a base case, rather than a weighted average assessment of what the different risks were under different scenarios.”
Put simply, the panel was comfortable with the definition of infrastructure assets, even late in the cycle. However, the panellists did express some concerns that people were bringing them fully priced services companies to analyse, companies that are associated with infrastructure but lack real asset backing.