Mid-market infrastructure assets offer value
Exploring the landscape for infrastructure investments given the challenging conditions in capital markets presently.
Large institutional investors have shown strong appetite for large marquee infrastructure assets in Australia and around the world recently. But mid-market infrastructure investments may offer better value than the larger assets.
Here, we explore the landscape for infrastructure investments given the challenging conditions in capital markets presently.
Big assets, big investors, big prices?
Many self-managed super fund investors (SMSF) will be familiar with the sale of a number of large high profile Australian infrastructure assets recently.
For instance, a consortium called NSW Electricity Networks won the bid for a 99-year lease for the TransGrid poles and wires assets at a price of over $10 billion. The consortium includes Canadian pension fund CDPQ, the Abu Dhabi Investment Authority’s global infrastructure fund Tawreed and Wren House Infrastructure, which is operated by the Kuwait Investment Authority, among others. This sale is an indication of both the strong global interest for large regulated assets and the amounts of money that can be mobilised for marquee assets.
In other deals, the Victorian Government has leased the Port of Melbourne for 50 years to a consortium of local, Canadian and Chinese investors for almost $7.5 billion. To the north, a Chinese business called Landbridge Group won a 99-year lease to operate Darwin Port.
These assets have been particularly popular with institutional investors given the current challenging investment environment. Low economic growth, low interest rates and high levels of volatility make infrastructure assets especially compelling at the moment.
Their stable, often regulated returns are particularly attractive to investors, who are increasing their allocations to infrastructure around the world.
Many of these investors, such as global pension funds and sovereign wealth funds, are very large and have substantial capital to put to work, which is one reason why the larger infrastructure investments are attractive to them. But these large global investors can also have different rationales for taking a position in these sizeable assets.
The sale of Darwin Port is a good example. By securing control of this asset, the Landbridge Group is able to achieve greater certainty over its supply chain and the business’s ability to transport resources into and out of Australia. For this investor, acquiring an interest was for strategic imperatives.
Turning to the sale of the NSW transmission assets, businesses such as Canadian pension funds have ongoing pension liabilities they are required to meet. Many operate defined benefit pension schemes, which means they are obligated to pay their members a defined pension, usually for the remainder of their lives.
The fact infrastructure assets often pay a regular, known distribution, often indexed for inflation, helps them match their assets to their liabilities. This is one of the main reasons Canadian pension funds have a strong appetite for investing in infrastructure assets and are looking for assets globally.
Perhaps unsurprisingly, given the high level of interest in these large assets, there has been a significant level of competition amongst investors to acquire them. This has meant the sale prices for many of these assets have exceeded vendor expectations. However not all infrastructure assets are subject to the same level of competition.
Mid-market sweet spot
Large infrastructure assets are an important part of the market. But they are only one part of the market. There are many other mid-sized and smaller infrastructure assets that also offer investors the potential for good returns.
Infrastructure assets can typically be categorised as either growth or yield focused.
An example of a yield asset might be a water utility which typically generates consistent, mainly income, returns which are underpinned by a regulatory framework. An example of a growth asset might be an airport exposed to air traffic growth in the Asian region. Asia is obviously a fast-growth market and inbound and outbound air passenger numbers are rising through the region. Airports also have the potential to offer and charge for ancillary services such as parking and retailing, which allows them to grow revenue more quickly than, say, a water utility whose revenues are set by regulation.
Accessing infrastructure assets
The characteristics of infrastructure assets make them attractive to all investors saving for retirement, whether they be multi-billion dollar institutional funds or SMSF’s.
However, accessing unlisted infrastructure investments has traditionally been beyond the reach of even the largest SMSF given the large asset sizes. The AMP Capital Core Infrastructure Fund is designed to bring the benefits of infrastructure investment to SMSF and retail investors. AMP Capital focuses on mid-market infrastructure assets as that is where we believe the best value exists for our investors.
The balance of growth and yield-focused assets in the AMP Capital Core Infrastructure Fund provides investors with exposure to a diversified basket of assets that have the potential to deliver consistent, long-term returns, including an attractive income yield, with low levels of volatility.
Like their global institutional investor counterparts, SMSF investors are increasingly allocating a portion of their funds to the infrastructure asset class.
The attractive risk/return relationship of these assets may be particularly attractive to investors in or near retirement looking for good quality assets that deliver income and stability in an increasingly volatile world.
About the author
John Julian is an Investment Director in AMP Capital's Global Infrastructure team, and the portfolio Manager of the AMP Capital Core Infrastructure Fund. He has over 23 years financial sector and investment experience in both commercial and legal roles.
Greg Maclean is responsible for developing and managing AMP Capital’s infrastructure research capabilities, and conducts both macroeconomic and policy research, as well as detailed due diligence analysis for specific assets.