Australia roundtable: From crisis to growth

With an economy that’s fast recovering thanks to the government’s effective response to the pandemic, opportunities abound in several sub-sectors.

This article is sponsored by ANZ and Pacific Equity Partners

Of all the countries affected by the coronavirus pandemic, Australia’s experience has been relatively serene.

There were the initial lockdowns across the country, which quickly lifted. These were followed by sporadic snap lockdowns in different state capitals at different times, including for an extended period in Melbourne, the capital of the south-eastern state of Victoria. International borders remain stubbornly closed to all but a small number of returning citizens and wealthy international celebrities.

However, at the time of writing the country has only suffered around 30,000 covid-19 cases and 900 deaths, the vast majority of which have occurred in Victoria. It has been a remarkable public health achievement when so many other developed nations have experienced terrible hardship. For investors it means the country’s economy has already snapped back into something like normal – and the participants in our 2021 Australia roundtable are all eyeing growth again.

Speedy recovery

Robin Dutta“The pace of the reversion from that ‘triage’ stage in March and April 2020 to recovery, even to growth now, has been eye-catching”

Robin Dutta
ANZ

“The pace of the reversion from that ‘triage’ stage in March and April 2020 to recovery, even to growth now, has been eye-catching,” says Robin Dutta, head of infrastructure at ANZ. “The consensus view is that the underlying health practices here have been pretty good compared with the rest of the world, and we shouldn’t overlook the sheer scale of the stimulus measures, which exceeds anything we saw in the global financial crisis.

“Both the public and financial sectors have learned a lot from past crises in terms of managing the balance of regulatory considerations with the need to support borrowers and the broader economy.

“This has all played a part in positioning the market for some exciting opportunities ahead. And infrastructure stands to benefit as much as other areas of the economy, if not more.”

Mark Hector, senior portfolio manager, infrastructure and real assets at Aware Super, says infrastructure has proved to be “highly resilient”.

After swiftly writing down some asset values at the start of the pandemic, the A$200 billion ($153 billion; €129 billion) superannuation fund changed course mid-year. “At our June 2020 end-of-year valuations we were already writing back some of the asset revaluations,” he says. “We realised that, certainly in Australia anyway, things weren’t going to pan out nearly as badly as we first thought.”

Return to growth

The new normal has seen investors do things slightly differently. Andrew Charlier, a managing director at Pacific Equity Partners, explains that his firm is now having much more regular formal contact with the LPs in its funds.

“We have a large series of superfund investors in our portfolio, who wanted week-by-week or monthly valuations, partly because of the pressures they had over early access to super,” he says, referring to the federal government’s Covid-19 Superannuation Early Release Scheme. “There was a big push to keep investors updated on where the portfolio might have impacts.

“Those conversations gradually changed over the past year, to the point now where it’s about growth, including asking what deals are coming up and wanting to deploy more capital. But there’s still a lot more communication going on with our LPs than there was pre-pandemic.”

The health crisis also affected fundraising. PEP held a final close on its Secure Assets Fund in June 2020 on A$360 million, a change to initial plans to keep fundraising for a while longer. “LPs, given that they thought they’d have a rush on withdrawals and that they might encounter the denominator effect, stopped all new commitments. We just cut our fundraising at the amount committed and went with that,” Charlier says.

“For a good three to six months no new funds were effectively raised. That is changing – we’re seeing fundraising come back and good money flow into funds, but almost all of it has flowed to existing GPs. If you’re a new GP or have a new strategy, it’s a challenging market.”

Hector says Aware Super’s strategy has evolved over the past 12 months, partly as a function of the changed pandemic world and partly because of the fund’s increased size. The Aware Super brand was born last year from the merger of First State Super, VicSuper and WA Super to create Australia’s second-largest superfund.

“We’re not really focused on supporting new managers or putting money into more pooled funds,” says Hector. “Our mandate and overall fund objectives have evolved over the last year or so, to a point where almost all our incremental capital needs to be deployed on a pure direct basis or through meaningful fee-free co-investments and partnerships where we can add value as a larger, trusted, reliable, sophisticated investor.”

This will not preclude the superfund from working with external managers forever, though this is not on the agenda for now.

“We’ve done plenty of research talking to other global pension fund direct investors over the last several years, and every single major player still has meaningful external relationships, so that will be critical in our future deployment, too,” Hector says. “But we’re seeking scale benefits and value for money for our members. That means we need to reduce that fee load and naturally increase the level of internalisation.”

The fund naturally turned inwards last year and focused on its Australian portfolios. This was largely because of the practicalities of doing due diligence on overseas investments when travel had been prohibited.

“Our natural competitive advantage is here in Australia,” Hector says. “We have people on the ground, we understand the market and the players, we are a trusted local owner of sensitive assets, and we’ve got tax advantages.

“But as the superannuation sector continues to grow, we need to continue investing offshore, and to do that cost effectively for unlisted investments in particular in future, we are investigating the potential to open some selective offices overseas.”

The recovery in Australia has been “broad”, Dutta says. Liquidity concerns abated quite quickly and constraints around capital have also eased, especially since the beginning of 2021. “The amount of financing volume we transacted in that early period in 2020 was equivalent to a normal year of business,” he says. “But by year-end, a lot of that activity had unwound. Facilities were repaid or cancelled as the broader market got a clearer outlook about what’s in front of it.”

This, in turn, led to far fewer distressed opportunities materialising than expected, Charlier says. “We saw so much liquidity come through, with great support from both the government and the banking sector, that businesses you would expect to run into trouble, like airports, didn’t really.

“I still think that’s building, as there are distressed situations that we know of that are coming, but we saw much fewer opportunistic deals than I expected.”

‘Incredible’ digital demand

Dutta says technology and digital infra have been an “obvious” bright spot over the past year, and continue to be so in terms of the health of the pipeline. “Last year wasn’t the first time we saw investment in digital infrastructure,” he says. “But what’s changed is that, as little as five years ago, there was still some variability in views about digital and as to whether it was strictly within mandate for certain infrastructure funds.

“Now, no infrastructure fund can ignore the space. The pandemic has reinforced the wider investment thesis, thanks to increased working from home, e-commerce and even things like e-health.”

Charlier says an “incredible wave” of demand for digital services is backing this up, but cautions that some investors might become exposed to higher levels of risk than they anticipate.

“We’re seeing the risk profile of some of these deals increase, particularly as people race to build capacity, as you have to take risk on offtake over time,” he says. “There is a great macro trend sitting behind that, but there is real operational risk in these assets.”

Aware Super made two big moves in digital infrastructure over the past 12 months. First, it tried to buy Australian Securities Exchange-listed fibre provider OptiComm in October, the first time an Australian superfund had tried by itself to purchase an ASX-listed company in its entirety. Aware Super ultimately lost out in a public bidding war to incumbent fibre company Uniti.

It then teamed up successfully with Macquarie Infrastructure and Real Assets to acquire Vocus, another ASX-listed fibre business with an extensive network in Australia and New Zealand. That deal was worth A$3.5 billion.

“Data is now well known as the new oil,” Hector says. “The data/tech sector was already getting quite a bit of interest before covid, in terms of asset classes like mobile towers, data centres, fibre. There’s a lot of capex that still needs to happen in the Australian marketplace, as well as globally.

“We’ve been pleased to get involved there with the Vocus transaction and are looking forward to doing more data-related deals in the years ahead in Australia and globally.”

Aware Super ended up walking away from its attempted takeover of OptiComm after it turned into a public auction, with the price edging upwards.

“We’re proud of that process as it was the first time an Australian super fund had tried to buy all of an ASX-listed company on its own and we had conviction that the original Uniti offer was materially undervaluing the company and was worth competing for,” Hector says. “We moved heaven and earth to do a lot of due diligence on that asset class and OptiComm in a relatively short space of time.

“We think that space in Australia was not particularly well understood by infrastructure investors – and that knowledge of the fibre space helped us move reasonably quickly on the subsequent Vocus deal alongside MIRA, where we have successfully recently signed up to a scheme implementation deed.”

Aware Super’s experiences bidding for ASX-listed companies – it also recently supported the QIC-led buyout of dual-listed Tilt Renewables as a substantial co-investor – is evidence of what looks likely to be a growing trend: more take-private deals.

Andrew Charlier“Take-private deals are inherently uncertain and they have a lot more complexity, so they’re not for the faint-hearted”

Andrew Charlier
Pacific Equity Partners

“Take-private deals are inherently uncertain and they have a lot more complexity, so they’re not for the faint-hearted,” Charlier says. “However, they have been a good hunting ground for us, and we did two last year.” PEP told Infrastructure Investor in April that these types of deals account for around a third of its activity.

“Given the amount of private capital that’s being raised, we see a lot of players looking at that market and I expect we’ll see more of these deals going forward,” says Charlier.

Hector echoes this and makes a salient point about the risks that superfunds might expose themselves to when trying to take companies private.

“The potential reputational risks, especially for an investor like ourselves, are more heightened than in private market deals, as these deals play out in the public domain,” he says. “We certainly pride ourselves as an organisation in wanting to act [in] an appropriate way with the right spirit, so you do need to be more careful and selective in the types of deals you get involved in, and the way you make approaches. In today’s world awash with plenty of capital, interloper risk is also always there.”

Economics driving renewables

Renewable energy and other energy investment opportunities were also cited by all three panellists as a growth area, despite years of policy uncertainty in Australia.

“Interest rates are so low that it means it’s very economic to replace opex with capex,” Charlier says. “So, the returns people are seeking to get when bidding into renewables are substantially lower, which means the opportunity for displacement of thermal generation is increasing.

“We see economics as the big trend driving increased renewables deployment – it’s not government policy driving the uptake.”

PEP owns Zenith Energy, a remote energy business that operates island power stations off the main electricity grid. Charlier says that business will be rolling out more subsidy-free renewable generation purely because it is cheaper than the alternatives.

“You could argue that the lack of policy alignment hasn’t held back investment in renewable generation when you add up the numbers,” Dutta says. “But I think getting that alignment is more important now to unlock the further investment we’re going to need to complete the energy transition.

“Among the investors we talk to, over the last 12-18 months there’s been a desire to gain a foothold in renewable generation assets, often through a platform investment. Given the consolidation phase that the market has entered over this period, those Tilt
Renewables-style opportunities are becoming more prevalent, even if they aren’t always at that scale. That will continue to be an opportunity for institutional capital.”

Mark Hector“In today’s world awash with plenty of capital, interloper risk is also always there”

Mark Hector
Aware Super

Aware Super is one of those investors that has made a platform investment, with its support for the acquisition of Tilt Renewables. Hector believes diversification is more important in renewables than in any other infrastructure sub-sector because of the problems that can arise unexpectedly with individual assets. This has been a problem for many investors in Australia in recent years owing to changing transmission loss factors.

“I think regulators have received the message loud and clear that they need to be more careful around allowing additional renewable developers to hook into unstable parts of the grid,” he says.  “And investors are naturally more careful making allowances for ongoing grid connection and instability issues, beyond the typical due diligence around aspects such as the strength of generation.”

Interesting future

Although concerns over grid constraints have not gone away, Dutta believes that things might improve: “The pipeline of transmission projects has picked up pace, a tacit recognition of the grid issues that have permeated the market over the last few years.”

Beyond digital infrastructure and renewable energy, where else do investors see opportunities? “I’d highlight healthcare, and I don’t mean building hospitals under the PPP model,” Dutta says. “We’re seeing a logical expansion of some infrastructure fund mandates into more operating businesses. The pipeline around social and affordable housing also seems to be on the increase.”

Charlier echoes Dutta’s optimism on both sets of opportunities, and adds the electrification of transport as an area to watch.

“People are looking at the design of future infrastructure in a different way than they were pre-pandemic,” Charlier says. “The electrification of the transport fleet is coming, for example, and the way that is playing out is creating a series of interesting investment opportunities, whether that is in last-mile embedded networks, the public transport fleet, or things like garbage trucks. There’s an interesting reconfiguration of how we do
non-aviation transport that is coming.”

ANZ, Aware Super and PEP are all gearing up for this new growth phase after what has been a turbulent year – even in Australia, where the recovery has been quicker than in most other nations. Infrastructure there has proven resilient through the crisis, though airports are cited as the main sub-sector to face material uncertainty.

The year has been a challenging one, of course, but sentiment is positive and fundraising and deal activity are both on the rise again.

As Charlier puts it, investors relived the five years of post-GFC experience within a 12-month period. “The crisis hit, then we had the drive for liquidity before the recovery started to materialise, and now we’re seeing growth on the other side,” he says.

“In the last 12 months we did four deals, two on the buyout side and two on the infrastructure side, which for us was actually a pretty normal year – even though it was the most abnormal year anyone’s ever experienced.”

Participants

Robin Dutta
Head of infrastructure and PPP, corporate finance, ANZ

Dutta runs the infrastructure and PPP team within ANZ’s corporate finance division. His role focuses on M&A/PPP financings across transport, social and digital infrastructure, with emphasis around the transition to a low-carbon economy. He was previously head of loan syndications for Australia at ANZ, which he joined in 2009. Prior to that, he spent 11 years at Citi with roles in Sydney and New York.

Andrew Charlier
Managing director, Pacific Equity Partners

Charlier joined PEP in 2007, having previously been a consultant with Bain & Company in the UK, Australia and New Zealand, specialising in utilities. He received an MBA from INSEAD and has a bachelor of engineering degree from the University of New South Wales.

Mark Hector
Senior portfolio manager, infrastructure and real assets, Aware Super

Hector is senior portfolio manager of infrastructure and real assets at Aware Super, the second largest superfund in Australia with A$140 billion of assets under management. Around A$9 billion of this is invested in infrastructure and real assets, which Hector has overseen since joining First State Super in May 2014. First State Super rebranded as Aware Super in mid-2020 following a series of mergers. Prior to this, Hector held project finance roles with Japanese bank MUFG, Leighton Contractors (now CIMIC), Babcock & Brown and ABN AMRO (now RBS).