Australia’s Future Fund Prefers Multiple Routes to Access the Infrastructure Opportunity
The choices available to institutional investors with an infrastructure allocation are mind boggling. They can make investments with listed or unlisted infrastructure fund managers. They can invest directly in infrastructure. Or they can co-invest. They can have exposure to listed or unlisted equities, listed or unlisted debt. They can choose from investment bank sponsored infrastructure fund managers, independent managers and private equity managers. There are global infrastructure funds, sector or regional ones, PFI and PPP funds. The list goes on.
The challenge for an institutional fund manager is in sifting through the multiple offerings and picking the right route to get capital to meet the opportunity in infrastructure.
For Raphael Arndt, the Melbourne-based head of infrastructure and timberland at Future Fund – Australia’s sovereign wealth fund – being flexible and open minded in working with infrastructure fund managers, and other partners, to access the best opportunities is the holy grail.
Arndt identifies co-investing with a fund manager as a way of fine-tuning Future Fund’s exposures to the type of infrastructure assets that best suit its investment strategy. That strategy is to earn an average annual return of at least 4.5%-5.5% above the Australian Consumer Price Index (CPI), which attracts the fund to infrastructure assets that are closely correlated to inflation. Co-investing allows it to take advantage of opportunities to access those assets and avoid increasing its exposure to investments that may not deliver the required degree of inflation protection.
“The types of funds that we’ve been attracted to are the ones with a high degree of transparency and potential for co-investing, and the ones in which we are able to tailor our exposures and portfolio to the exposures that best suit our need,” he says.
Future Fund has invested in unlisted infrastructure funds managed by Citigroup, UBS and Highstar. It has co-investments in the regulated UK water sector – in Kelda and Southern Water – alongside Citi Infrastructure Investors (CII) and UBS.
“We really need to work with fund managers and we don’t have any problem with investing into funds alongside managers. The strategy we’ve developed is to invest in funds where that makes sense to us but also to focus on co-investments and some direct investing,” Arndt says.
On the direct investing front, Future Fund holds a 16.8% stake in Australian Pacific Airports Limited (APAC), the holding company of Melbourne and Launceston airports. It also acquired a 17.23% shareholding in the UK’s Gatwick Airport last December for a rumoured AUD200m (USD201m) from Global Infrastructure Partners (GIP). GIP is managing that asset.
However, Arndt is generally cautious about direct investing in which an institutional investor like a sovereign wealth fund or pension fund acts as the chief sponsor to a project. Whether an institutional fund manager attempts this kind of investment is highly dependent on how the investment team has been put together, he says. “You won’t see us taking that lead sponsorship role anytime soon.”
His view is that more institutional investors like Future Fund will need to co-invest with fund managers in order to participate at the front end of transactions and deepen their knowledge of the asset class.
“Our approach is to find partners that we can invest alongside and be aligned with and they can be aligned with what we are looking for. And if we bring capital to the table, which is primarily what we are doing, and others can bring some sort of operating expertise or origination expertise, whether they are corporates, operators, other funds like us, or whether they’re fund managers, we’re very open to that,” he says.
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