Aussie investors prefer going direct: report

Infrastructure Partnerships Australia found just 49% of respondents saw ‘compelling’ investment opportunities in Australia, leading to a growing preference for unregulated and core-plus assets.

An overwhelming 94 percent of investors surveyed by an Australian think tank survey said they preferred to invest directly in infrastructure or as part of a consortium, with just 6 percent preferring to invest via fund managers.

The trend was explained by the growing size of Australian superannuation funds which increasingly have in-house teams that want to do deals directly, Infrastructure Partnerships Australia said.

IPA, an independent think tank and member network spanning the public and private sectors, published its annual Australian Infrastructure Investment Report last week, finding that 90 percent of respondents were “highly likely” to invest in Australia in the next two to three years, the same result as in 2018.

However, it found that just 49 percent saw “compelling investment opportunities” available in Australia, suggesting a lack of dealflow. This contrasted with 79 percent who saw “compelling” opportunities in North America.

As a result, IPA found, investors are increasingly moving up the risk curve to do deals, with 64 percent showing a preference for core-plus infrastructure assets. This placed core-plus assets on the same level of desirability as rail and water assets for the first time.

Relative preference fell for most asset types in this year’s survey, with the exception of renewable energy, passenger rail, and energy transmission and distribution.

Sixty-seven percent of investors said that renewable energy was a preferred asset type for investment, up from 52 percent in 2018. Sentiment towards traditional core assets like airports and ports fell, with preference for airports dropping from 67 percent to 54 percent and for ports from 64 percent to 46 percent.

Investors were wary about the lack of a policy framework in the renewable energy sector, though.

One anonymous institutional investor respondent said: “We simply are not prepared for bringing such a large volume of renewables into the system in the last two to three years. We don’t have a clear road map ahead of us as to what the energy mix is or how the system will cope in the next six months, never mind the next six years.”

Interest in unregulated assets has also grown, with 43 percent of investors expressing a preference for them – the highest percentage the segment has scored to date –  in comparison to 17 percent who favoured regulated assets and 40 percent who expressed no preference.

Investors continued to express a willingness to deploy larger amounts of capital in the country, with 32 percent of respondents indicating they were comfortable investing more than A$5 billion ($3.4 billion; €3.1 billion) in Australia – the first time any respondent has said they were comfortable above that level.

Uncertainty has ‘little upside’

IPA chief executive Adrian Dwyer cautioned that, while Australia remained popular, too many risks were emerging for investors with few rewards to counter them.

“Australia operates in a global investment market and we can’t expect to retain capital if we don’t treat it well. While some risks are symptoms of a busy market, or offer rewards proportionate to the risks being taken, policy and regulatory uncertainty have little upside for investors, taxpayers, or customers,” he said.

“Meddling in infrastructure markets will only undermine our investment reputation and make destinations like North America more attractive. We shouldn’t be leaving investors feeling unsure of the rules of the game, or the process by which those rules are changed.

“Decision-makers across government need to be aware of the contagion effect that uncertainty has across the sector and start heeding investors’ calls to return regulatory and policy stability to the key infrastructure markets.”

Research for the report was conducted in September 2019 and IPA received responses from 49 ‘senior market participants’ investing in Australian infrastructure, from organisations including banks, fund managers, domestic superannuation funds, foreign pension funds, and infrastructure contractors and operators. The respondents own or manage around A$490 billion of infrastructure assets around the world.