Doing things the IFM way

“I’m sure if we put our 70 investors in a room, they would all get along – we have good alignment of interests,” Brett Himbury, Industry Funds Management’s (IFM) chief executive, quips towards the end of our interview in London.

He’s not just guessing. While Himbury may not have conducted this particular experiment yet, he saw how IFM’s investors and employees got along at this year’s annual general meeting – “Everyone was like colleagues” – and he’s willing to put his money where his mouth when it comes to preserving IFM’s unique culture:

“We are very selective. We want to grow and diversify, but we are very selective in saying no to cultures and people that we think don’t fit our organisation; in saying no to clients who may not be institutional, long-term investors like us,” Himbury explains.

“We have said no to investors and some in this part of the world [UK] have been gobsmacked and say things like: ‘But it’s a £100 million (€127 million; $157 million) mandate’. And we answer: ‘Thank you, but it doesn’t align with the long-term, institutional client-base that we aspire to build’,” he adds.

Himbury’s protectiveness of Melbourne, Australia-based IFM’s culture is understandable: after all, the firm offers a unique ownership and pooled investment model that is now the talk of the town in the UK and – general partners (GPs) beware – could easily inspire institutional investors in other geographies.

In the UK, though, the nascent Pensions Infrastructure Platform (PIP), in documents made public by one of its potential cornerstone investors, made it quite clear that this group of 10 to 12 UK pensions was seeking inspiration from IFM as they look to avoid traditional infrastructure funds in setting out on the road to investing in the asset class.

Himbury acknowledges the flattery and says IFM sees the PIP as a club of like-minded investors.

“There are a couple of key principles that they’ve outlined that we absolutely subscribe to: infrastructure is a long-term investment so make sure you have an long-term fund structure that matches that; infrastructure shouldn’t be overly geared; infrastructure fund managers should focus solely on the interests of their clients and therefore the fee structure should be aligned with that ideal,” the IFM chief says, concluding:

“So the principles that they have outlined – we absolutely subscribe to them, they are part of our cultural fabric.”

Pioneers

IFM’s culture is not the only unique aspect the superannuation-owned asset manager can boast: the Australian outfit was also a pioneer in its approach to infrastructure investing.

“Infrastructure has been, arguably, what IFM has been renowned for and was, in essence, how we started,” Himbury says. “Infrastructure was our primary capability. And the logic behind that, many years ago, is that we saw infrastructure as being the ideal match to the liabilities of pension funds.”

“I know everybody is now nodding their heads violently in agreement, but 17 or 18 years ago, we took a leadership position,” he argues.

Despite its undeniable contribution to the IFM brand-name, infrastructure is not the only asset class IFM is invested in. Of the A$35 billion IFM manages for its investors, A$11 billion is invested in infrastructure, A$11 billion in Australian equities, another A$11 billion in Australian debt, and the remaining A$3 billion in Australian private equity.

As you may have noticed from the above description, infrastructure is the only international asset class IFM manages. According to Himbury, that is not accidental.

“The experience we gained in Australia over many years, we thought that was replicable, globally, for infrastructure. It’s arguably harder to do that now – frankly it was a less competitive environment in infrastructure many years ago – whereas clearly there had been large and established global equities managers.”

“So we clearly developed an expertise and thought that expertise could be scaled and replicated in other parts of the globe in a relatively less competitive market – and so we did,” he concludes.

A high-profile cheque

That expertise paid off handsomely in the form of a very high-profile commitment earlier this year: a $500 million cheque from North American pension fund the California State Teachers’ Retirement System (CalSTRS) – the largest-ever single allocation to an infrastructure fund by a North American limited partner. 

At the time of the commitment, Christopher Ailman, CalSTRS’ chief investment officer, explained the pension’s decision by saying that “CalSTRS is relatively new to the sector and we want to get to know it well before we venture beyond the fund structure”.

“Firstly, we are very proud and pleased that CalSTRS chose IFM. We think it’s a wonderful endorsement of our model, our experience and our track record. But we have also raised a lot of money from other people,” Himbury says.

“We certainly do not underestimate the high-quality due diligence CalSTRS did before making that decision. But there have been lots of other people doing the same thing and coming up with a similar decision – we just can’t talk about it. We’ve raised a lot of money over the last few years. We are particularly proud of CalSTRS, but it’s not an isolated occurrence,” the IFM chief executive adds.

Still, Himbury believes the symbolism of CalSTRS’ commitment reaches beyond IFM.

“Going right back to basics: the second-biggest pension fund in the biggest pension market in the world – and this is one of their earlier commitments to infrastructure – that tells you something in its own right. Clearly, infrastructure is getting a lot of attention from the large and sophisticated investors in the world. Many investors are now looking at infrastructure as a relatively new investment for them. But when they invest, they have lots of capital to commit and that’s exciting.”

He adds: “The challenge for us now is to be patient in the deployment of the money. And that’s not a problem for us because our ownership model allows us the luxury of being patient – we are not a closed-ended fund, we are not a profit-driven firm, so therefore we can be patient. We can be disciplined and prudent in the deployment of that [capital] to make sure CalSTRS gets the experience we have delivered to our other investors over the last 17 to 18 years.”

Patience is, indeed, one of the hallmarks of the IFM investment model.

IFM’s last big investment, for example, took place in 2010, when it put down €800 million, together with Belgian strategic partner Elia, to acquire 50Hertz Transmission, one of Germany’s four electricity grid operators, from Swedish firm Vattenfall. In fact, the whole story behind the 50Hertz acquisition is a monument to patient investing.

Christian Seymour, IFM’s global head of infrastructure, recounted in these pages exactly two years ago, IFM’s purchase of the German transmission grid was a couple of years in the making.

“We sat out the initial auction [which resulted in a Goldman Sachs/Allianz/RREEF consortium being named as preferred bidder, before negotiations broke down]. The regulatory framework [for 50Hertz] did not provide the certainty we required. But those uncertainties were addressed over the following 12 to 18 months. And then the other consortia fell away. We quickly formed a consortium with Elia, conducted due diligence and negotiated with Vattenfall,” Seymour recalled.

Gesta non verba

The ability to be patient is, as Himbury points out, a direct result of IFM’s unique ownership model. Put simply, IFM is an infrastructure fund manager “run by pensions for pensions,” to borrow a term from the UK’s PIP. It is owned by 32 Australian superannuation funds – “There used to be 35, but they keep merging with each other so the number keeps going down,” jokes Himbury – and counts 70 LPs worldwide.

“Some 45 of those 70 [LPs] are Australian institutional investors – many of them industry and corporate superannuation funds. So about one in two Australians are in an industry fund which in turn invests in IFM. And we never lose sight that there are a lot of individual clients coming together through these vehicles. So we have 70 clients, but a lot of underlying people depending on us doing the right thing,” Himbury stresses.

That unique ownership model certainly explains some of the more unusual moves coming from the IFM camp, such as last year’s 12.5 percent fee rebate to investors.

“Eyebrows were raised in certain parts of the world because people hadn’t heard of this,” Himbury says. “We delivered strong returns, outperformance through the skill of the team, and as a result we raised a fair amount of money. The net result of those three things was that we had more funds under management than we anticipated. And funds under management drive scale, and scale drives benefits.”

“We found ourselves in the luxurious position of having more scale than we anticipated. The question then became: what do we do with it? At our firm, the answer is pretty easy. Why and how did these benefits accrue? They accrued due to the support of our investors, so give it back to them. A 12.5 percent fee rebate was entirely the right thing to do – very much aligned with our culture and heritage – and a very pleasant surprise to our investors around the world.”

“One of the few bits of Latin in our firm is gesta non verba ¬¬– deeds not words. Lots of fund managers say they are there for investors. That deed [the rebate] reinforced the importance of our words. Words are something we can all say; deeds are far more important,” Himbury states.

A fund manager at heart

Make no mistake about it, though, IFM is an infrastructure fund manager through and through and Himbury has words of caution for pensions who think they can go at it alone.

“What we are seeing now is a lot of pension funds wanting to invest in infrastructure. Some of the bigger ones sometimes get to the stage where they want to do it themselves. Of course, we have a vested interest in saying use IFM or somebody else. But infrastructure is a long-term investment and anything can happen over a 50-year investment. So if you are going to do it yourself, be really prepared to assess the risks that might happen over that 50-year period and be prepared to buy well, but to also manage”.

The IFM chief is adamant about the false economies some LPs will get in going direct and cutting out traditional GPs.

“I’m empathetic to the money problem, especially in a low-return environment, where people eye improved returns by cutting costs in the middle. But let’s not save a dollar to miss out on two or three. Infrastructure has, over the last 17 to 18 years, delivered 12 percent net per annum to our Australian clients. So it has been more expensive than deploying to equities or fixed interest, but it has been very positively accretive to our underlying membership base,” Himbury stresses.

“Doing it yourself, you might be paying 80 percent of what you would otherwise pay, but you are not getting 12 percent returns, you’re getting 9 percent. You have to be careful that you’re not saving 20 points to give up 300 points, because that is the order of magnitude we are talking about in IFM’s case, where we are already at the sharp end of the [returns] equation,” he adds.

Despite last year’s fee rebate, Himbury is also quick to point out that acquiring and managing assets costs money.

“The deals we’ve been on – we had 14 people looking at those deals. And then we run a shadow team in another part of the world. So if Christian [Seymour] and the team are doing a deal here [in the UK] then we have another team in another part of the world that are going to mitigate against the risk of us getting caught up in the deal frenzy.”

Asset management is particularly resource-intensive, the IFM boss warns. “These things [infrastructure companies] are intense. We sit on 26 boards. And if you’re going to sit on a board, you don’t just sit on a board, you have to contribute to a board because it’s a large scale enterprise that requires commitment”.

“The big risk is that some of these pension funds think they can do this all by themselves. You need to have large-scale, high-quality, long-term commitment to the asset class for it to be successful. So make sure you have that commitment and resource [if you’re investing directly],” Himbury concludes.