The $300 billion AustralianSuper is looking to move up the value chain when it comes to investments in real estate and infrastructure, according to its head of mid-risk portfolios, Jason Peasley.
In an interview with Investment Magazine, Peasley, who oversees a portfolio of some $65 billion of AustralianSuper’s assets, said the fund was moving beyond passive investments in these assets, to becoming more involved at a high level in projects as a major investor, where it can play a much more active role in determining their future.
The move is part of a strategy to double the assets in its “mid risk” portfolio to more than $150 billion by 2030.
“We’re taking larger stakes in businesses and being more of a lead owner, as opposed to being a minority investor following the owners,” said Peasley, whose portfolio includes real estate, infrastructure, and private credit, with a staff of some 100 spread across Australia, the US, the UK, and Europe.
“We are less reliant on partners and looking to build out in our own right if those businesses make sense for us. We’re also going into businesses which can more actively drive the underlying assets- evolve them, reinvest in them to generate new revenue streams.”
“We’re very much focussed not only on just owning these assets but managing them actively- developing them actively and being responsive to customer and community needs, thinking about these businesses and more integrated operating businesses rather than being static assets which just earn rental income over the years.”
The approach has included bringing real estate and infrastructure together as part of a broader class of “real assets.”
“Historically, infrastructure and property were quite separate, well-defined asset classes – a toll road is a toll road, an office building is an office building,” he says.
“What we have found is that there has been breaking down traditional asset class definitions. We are seeing more overlap and more linkages.”
“What we have seen over the last ten years and going forward, is the big structural shifts within those asset classes- shifts that are being driven by a number of the big trends that are affecting the world – deglobalisation, decarbonisation, digitisation, demographics.”
In October, the mega-fund merged its infrastructure and property teams under a global “real asset” team led by the fund’s former head of infrastructure, Nik Kemp, who reports to Peasley.
Peasley cites data centres as one of the new assets of the future which could be seen as a mixture of property and infrastructure.
His team recently signed a $2.5 billion deal to buy a stake in Vantage Data Centers Europe, Middle East and Africa – AustralianSuper’s first significant exposure to data centres.
It will join with digital infrastructure specialist, DigitalBridge, to grow and develop data centres across the region.
“Vantage is a data centre development platform with a growth pipeline ahead of it,” Peasley says.
This followed more than two years of research and looking at deals in the sector which the fund sees as a big growth area of the future as companies move more of their data into the cloud and as artificial intelligence plays a greater role in the operation of businesses.
“We are all transitioning to the cloud and utilisation (of data centres) is growing exponentially. There is a very strong secular tailwind to sectors like that.”
Peasley says the digital sector can also include assets like mobile phone towers, which the fund owns through Indara the rebranded the former Optus mobile towers it bought in 2021, and optical fibre networks.
“There’s an interconnectedness across all those assets. The learnings we get through active ownership are really powerful for how we can invest in related sectors across the portfolio.”
Bay Area backing
Peasley cites Generate Capital in the US, which looks for green energy solutions, as another investment of the future for the fund.
AustralianSuper and QIC injected more than $1.3 billion into the San Francisco-based infrastructure asset manager, in February 2020.
The company describes itself as a “one-stop shop” providing finance for sustainable projects including clean energy, transportation and waste and water.
“It’s a platform which is supporting developers of a range of initiatives as part of the energy transition,” says Peasley.
“It includes micro green energy or energy transition initiatives.
“It does them at scale across the country.”
“We don’t have the expertise (in this sector) but by investing in a platform which has the capability we can achieve the necessary scale and still get to play in those markets.”
Peasley says there is now an “insatiable demand for capital (globally) in developing new real assets” with the energy transition being one of the big themes of the future.
Another major project in Australia for the fund has been the investment in a logistics centre in Moorebank in Sydney’s west – a project which has the potential to become a major distribution centre for the city connected by rail to the Port Botany and by road to Sydney Airport.
“There is a need for large capital investment for a bespoke automated logistics and distribution centre,” Peasley says. “Both the buildings and the connectivity are seen as a total value package by the end customer.”
AustralianSuper was also one of the consortium partners which bought Sydney Airport early last year for about $24 billion.
“We’ve been happy with the early (days of the) investment in terms of it meeting expectations,” he says. “We’ve gone into it knowing it’s a long journey.”
He said the airport had been facing some “external headwinds” as a result of pandemic travel restrictions, but its main challenge these days is its long term positioning as the premier gateway to Sydney “and its ability to provide the capacity demanded of it by its customers – the airlines and their passengers.”
AustralianSuper’s global learning curve in investing and managing “real assets” has included some painful lessons along the way such as the losses on a group of office buildings in Washington, DC, which it bought eight years ago alongside Canadian giant, Brookfield.
The buildings have suffered as office workers stayed at home during Covid-19 and US federal government staffers have failed to return to the same extent as in other cities, such as New York.
Peasley admits that the value of the assets, which include eight office buildings in the US capital, is now much less than what AustralianSuper and Brookfield paid for them.
AustralianSuper and Brookfield also jointly own the Ala Moana shopping centre in Honolulu, the largest open air mall in the world, whose valuation Brookfield has estimated to have fallen by $US800 million in the past two years.
“If you think about office buildings post Covid and retail assets over the last 10 years, we have had investments in those sectors- particularly in the US- which haven’t gone well,” Peasley admits.
“We did learn lessons- not quickly enough to get out of them, but in time to make sure we could make sure they stayed a very small proportion of our portfolio,” he says.
Peasley says returns on infrastructure investments are increasingly outstripping returns from property these days.
“Infrastructure historically has had about a 2 per cent better return than property,” he says. “In the last five years, that differential has grown out to about five per cent. Property is dealing with a number of structural headwinds at the moment.”
But he points out that within the category, there have been some sectors still doing very well such as industrial property which has been up by 14.3 per cent over the past year in Australia compared to retail which has gone backwards.
Peasley says AustralianSuper’s approach to managing real assets includes being willing to sell down assets to generate cash.
This has included selling down its stake in NSW electricity company, Ausgrid.
AustralianSuper and industry super fund investment vehicle, IFM Investors, stepped in quickly to buy the 50.4 per cent of Ausgrid being sold by the New South Wales Government in 2016 when the state government was forced to reject interest from Chinese and Hong Kong buyers at the last minute because of security issues.
In the past two years, AustralianSuper has sold down its stake in Ausgrid to its current level of 8.4 per cent generating several billion dollars.
Peasley still remains on the board and indicates that there could be opportunities for the fund to inject more capital into it as the electricity company makes the transition to cleaner energy.
“We recognise that an asset like that will come back and present future capital investment opportunities as a platform which seeks to participate in the energy transition,” he says.
“There is no lack of investment opportunity, hence the fact that it is wise to sometimes think about taking a bit of money off the table to be ready to invest again when opportunities present themselves.”
Peasley’s “mid risk” portfolio also includes $6 billion in direct credit.
He says the fund is seeing more opportunity to invest in private credit as interest rates rise, putting an end to the days when borrowers could raise funds for near zero interest rates.
“We are seeing opportunities in the returns we are getting in the private credit space,” he says.
“Debt was very cheap in the past. There was a base rate of zero to one per cent for many years which is now at four or five per cent. It’s become relatively more attractive as an investment.”
The investments are mostly overseas because of the depth of markets.
“We have got teams (in this sector) in London and New York to invest there,” he says.
Looking ahead, Peasley, a self confessed “infrastructure geek” who has been with AustralianSuper for almost 13 years, is hoping that central banks around the world will be able to take the heat out of inflation with a soft landing and avoid recession.
“That would be a good outcome- but we have to prepare for the worst and hope for the best,” he says.
He says AustralianSuper is conscious that its new approach to buying and managing “mid risk assets” will raise the risk profile of some of its investments.
“But we expect to be well rewarded for it and we are actively building out our capacity to invest into these spaces.”
“We want to end up with a portfolio which will have a range of assets across the life cycle and across the emerging sectors we expect to benefit from the new secular themes.”