The new entrants on this year’s GI 50 could provide a glimpse of a future trend: Australian superannuation funds becoming increasingly heavy hitters on the infrastructure investment scene.
The country’s fund managers, of course, have always featured high on our corresponding ranking of GPs. Yet although superfunds have allocated significant sums to the asset class for decades, they were mostly overtaken by larger overseas LPs in our top 50.
On this year’s list, three of our eight new entrants are non-profit industry superfunds. These are continuing to grow thanks to industry consolidation, which is being accelerated by government reforms. Along with Sunsuper and Rest, Hesta is the highest new entrant of them all, coming in at number 33.
Hesta has invested 10.7 percent of its A$45.7 billion ($35.3 billion; €29.2 billion) of assets under management in infrastructure, giving it an allocation to the asset class of A$4.9 billion at the time of our ranking.
The fund’s general manager, unlisted assets Will MacAulay says its reasons for investing in infrastructure are simple: “It delivers good risk-adjusted returns, it’s yielding, it’s resilient to downturns given the nature of the services it provides, and we believe it is inflation-protective.”
The asset class has what MacAulay describes as a “really strong” place in Hesta’s portfolio thanks to those characteristics and the compulsory superannuation system that has been in place in Australia since the early 1990s.
“One of the benefits of the superannuation system is that you get really long-dated capital, as it is essentially locked up for a person’s entire working life,” he says. “The average age of a Hesta member is 43, so with the retirement age at 65 you have 20-plus years to deploy your capital. That gives us a lot of flexibility to invest in unlisted assets, including infrastructure, and we believe there remains a strong illiquidity premium that can be captured when you’re able to take advantage of that.”
“We’re pursuing a hybrid model, trying to get the benefits of direct access alongside the benefits of working with expert partners to help us execute”
Hesta’s biggest exposures are in the transport and energy subsectors. The former is dominated by airports, toll roads and ports; the latter by regulated assets in the transmission and distribution space, with some generation too. It has also begun to ramp up its exposure to renewable energy generation, as well as digital infrastructure.
“The pandemic really emphasised the importance of digital infrastructure, showing that the internet is an essential service,” MacAulay says. “We did know that before, but covid-19 put more emphasis on building our resilience in that space.”
MacAulay says Hesta’s strategy has always been to ensure it has a well-diversified infrastructure portfolio, which has stood it in good stead over the past 18 months.
“I’m very glad that we had a diversified portfolio,” he says. “When we look back at the impacts of covid-19, many of those were not as predictable as you might think, so being diversified across as many characteristics as we could find really helped smooth out some of those unforeseen consequences.”
The fund made its first direct infrastructure investment in 2019, joining with Sunsuper as co-investors in a consortium led by Macquarie Infrastructure and Real Assets that acquired a stake in Landgate, Western Australia’s land registry business. Hesta’s stake in the consortium was 15 percent.
Direct deals are another trend that is being seen across Australia’s superannuation sector, where funds are conscious of making sure they are not paying too much in fees to external managers. Going direct, notwithstanding the start-up costs that come with building internal management capabilities, is one way around this.
“One of the benefits of the superannuation system is that you get really long-dated capital, as it is essentially locked up for a person’s entire working life”
“We are evolving the portfolio as we grow,” MacAulay explains. “When we were much smaller than we are now, we relied on pooled capital and externally managed vehicles. We still firmly believe in the value of those expert partners that can help us to find opportunities and manage assets. But as we grow, and our scale is now such that we can act materially in our own right, we will absolutely look for great individual transactions that we can enter into directly.
“It won’t be everything that we do, but it will be an increasing proportion of what we do from here on. We’re pursuing a hybrid model, trying to get the benefits of direct access alongside the benefits of working with expert partners to help us execute.”
Looking ahead, MacAulay hopes that rising inflation, should economists’ worst fears be realised, will not have too detrimental an impact on Hesta’s portfolio. “I really hope it will prove the thesis we have, which is that infrastructure is great protection against inflation. These assets provide essential services, so are either explicitly linked to [the Consumer Prices Index] or are well-positioned to pass through inflationary periods.”
MacAulay does not expect Hesta’s allocation to infrastructure to materially increase. But as the fund grows larger, the size of its portfolio will have to rise in proportion with overall AUM. “Infrastructure looks quite attractive to us as an asset class,” he says. “We’re a growing fund, so that dollar-figure allocation is expected to grow.”