One of the advantages of holding an infrastructure conference in Australia – as we did last week with our second annual Melbourne Summit – is that you get to hobnob with some of the asset class's most sophisticated investors. After all, this is Australia, the land that 'invented' infrastructure investing decades ago and continues to be at the forefront with initiatives like its much-vaunted asset recycling programme.
So it should perhaps come as little surprise that Australian investors know what they want out of the asset class. Case in point: infrastructure's ever-expanding boundaries. Crematoria, land registries and other 'esoteric' assets might raise eyebrows and elicit some cheap shots from pundits stuck in the mid-noughties, but the investors at our conference were much more concerned about whether those assets ticked the boxes they require from an infrastructure investment.
As Mark Hector, portfolio manager, infrastructure, for First State Super put it at our recent Australian roundtable: “The important thing is that you look at the right risk-return. We're less concerned about whether it fits neatly in the infrastructure box or a property box or a private equity box, but essentially, we're looking for good investments.”
That view was echoed by Adrian Best, head of infrastructure, Victorian Funds Management Corporation (at a panel with Hector, coincidentally) who explained that “what is infrastructure is really a decision for the investor. We get asked that a lot internally and it would be great to have an answer for it. I hope in five years we will have a clearer view of what infrastructure is, which might be split into some sectors”.
In that sense, traditional infrastructure sectors in certain markets might actually offer fewer infrastructure characteristics – from an institutional investor perspective – than less orthodox ones. Hector pointed to Australian renewables as an example of that, complaining that “we've seen returns continue to come down while, at the same time, merchant price risks are going up”.
That's not to say there was no agreement on what an infrastructure investment looks like (or a willingness to accept every new-fangled asset that gets packaged as infrastructure). On the contrary, there was a broad view that infrastructure investments are expected to return in the region of CPI plus 6 percent net of fees with some running yield attached. There was also consensus on the defensive role infrastructure plays in investors' portfolios and endorsement of staples like high-barriers to entry and monopolistic characteristics.
Beyond that, though, it makes little sense to speak generically of strategies pursued in isolation from the needs of the institutional investors pursuing them. For example, someone like Jordan Kraiten, head of infrastructure at Hostplus – which is overweight towards infrastructure at 12 percent of its portfolio and with a member base averaging in their early 30s – has a different approach to the asset class than Hector, whose First State Super hasn't traditionally invested much in alternatives (partly due to its original mandate “to be the single lowest-cost fund in market”) and is now playing catch-up.
Hector, in turn, has to be stricter about costs than Victorian Funds Management Corporation's Best, who got a good-natured ribbing from his colleagues for stating: “We're not the biggest supporters of 20 percent [carry], but it does create some alignment [of interests] with a hurdle rate of 8 percent.”
All of which is another way of saying that talking about infrastructure as a perfect match for institutional investors means very little if the conversation remains superficial. That's a useful reminder for those chasing institutional capital, be they GPs, developers or governments – like the US's – mulling large-scale programmes. Otherwise, all that talk about infrastructure investment will probably not translate into much action.