Charting the changes

Martin Stanley looks daunted at first, and then a smile breaks out. He has just been asked to assess the evolution of Macquarie’s infrastructure investing activities since the Australian banking and financial services giant first launched into the space around 20 years ago.

The smile is because he now recalls a similarly enormous challenge that faced another member of the Stanley family. “My daughter had an exam, and I asked her what it was about and she said ‘it’s about history from the Incas to the 1980s’,” he says, laughing.

Once he’s recovered his poise, however, the London-based global head of Macquarie Infrastructure and Real Assets (MIRA) goes on to make some very interesting observations about said evolution. For example, he points out that what was once a strong bias to listed infrastructure funds has become an equally strong bias to unlisted funds (but could perhaps begin inching the other way again).

Stanley explains: “Around five years ago, about 80 percent of our assets under management were in listed funds. Today, it’s the other way around. The global financial crisis brought volatility to stock prices and meant investors were more focused on unlisted funds. So we returned a lot of capital to our listed investors and raised a lot of capital for unlisted.”

New capital

Indeed, the firm seems very keen to promote the statistic that it has raised $9.3 billion of new capital over the last couple of years, aided by the €2.75 billion final close of its unlisted Macquarie European Infrastructure Fund 4 (MEIF 4) in early May this year – a fundraising which beat an original target size of €1.5 billion to €2.0 billion and which included a further €2.0 billion of co-investment arrangements.

However, an equally notable stat is that the firm’s listed funds have gone up in value by around $3 billion over the last 18 months, with Stanley acknowledging that they have generated good yield for what is these days a yield-hungry investor base. So, does that mean a revived emphasis on listed funds? “It’s about the product that the client wants,” replies Stanley. “If the clients want listed funds, that’s what you ought to do.”

This last response from Stanley might seem like a throwaway remark, but he refers so often to the importance of responding to client need (“without investors, we don’t have a job”) that it speaks of a cherished philosophy within the walls of MIRA’s Ropemaker Street office. It helps that he has specific examples up his sleeve.

For instance: “We have a fund focused on Mexican real estate, which started as a $1.1 billion fund and has traded up to between $1.3 billion and $1.4 billion. That fund was the result of having clients in our Mexican infrastructure fund who wanted exposure to other real assets.”

Perhaps this determination not to veer an inch away from what its investors demand and expect is another aspect of the Macquarie evolution. When the Crisis broke, there were voices of disapproval around ‘private equity-type’ strategies in infrastructure and alleged over-leveraging of assets. In an October 2007 interview with the Financial Times, then-Macquarie Bank chief executive Allan Moss was moved to defend the use of leverage in the bank’s infrastructure funds, describing it as “reasonably conservative”.

Reputation

Whatever the truth of the matter, mud has a tendency to stick – and there’s no doubt MIRA had something of a reputational issue to confront in the post-Crisis era. It’s informative that MEIF 3, the forerunner to MEIF 4, closed on a relatively modest €1.2 billion in March 2010 – a long way down from the €4.6 billion collected by MEIF 2.

The most recent European fundraising indicates that even if the press around Macquarie can still be less than enthusiastic at times – the firm must shudder at every mention of portfolio company Thames Water’s tax affairs for instance (however unfair the headlines) – it at least appears that limited partner investors have been won over.

Stanley acknowledges that – having invested in the likes of communications infrastructure firm Arqiva, Wales & West Utilities and Brussels Airport as well as Thames Water – “Europe is a really important part of what we do, and the fundraising is a testament to our success here. We’ve supported big, important, strategic infrastructure in Europe and the region accounts for the largest portion of our assets under management”.

Indeed, MIRA’s own figures reveal that Europe accounted for some 57 percent of its assets under management (AUM) by region at the end of 2012.

Moreover, this is a large slice of a very large pie. Last year’s Infrastructure Investor 30 ranking showed MIRA as by far the largest infrastructure investor globally, having created $23.7 billion for investment in the asset class over a five-year period. This number was more than double the $11.2 billion boasted by the number two firm, Brookfield Asset Management.

Accounting for 29 percent of AUM at the end of last year was North America, where the firm has two existing funds (the first of which is now fully realised) and a third in the market with a $2 billion target. Market sources say the firm is hoping for a first closing on the third fund by the end of the summer.

“Core plus”

Stanley says the firm has more of a “core-plus” approach in the US, compared with its targeting of core assets in Europe. Among the investments made by Macquarie Infrastructure Partners – the US arm of the business – are Puget Sound Energy, Global Tower Partners and WCA Waste Corporation; assets with a “higher return profile” than is typical of MIRA’s European assets. Stanley says deal flow in North America is “very strong”.

But it’s when talking about Asia that we return to thoughts about the evolution of the business. According to the same Macquarie figures referred to earlier, Asia (excluding Australia and New Zealand) accounted for just 10 percent of assets by region at the end of last year. However, it is clear that MIRA is pinning a lot of hopes on the region’s future.

Stanley talks of a “global handover of power” from West to East, and feels that MIRA has begun building “strong positions” in Asia through relationships with the likes of financial group China Everbright (which led to the creation of the $729 million Macquarie Everbright Greater China Infrastructure Fund) and with State Bank of India (represented by the $910 million Macquarie SBI Infrastructure Fund).

The firm has also long had a Korean fund – “a big part of our development [in the region]” – which was launched in 2002 and listed in Korea and London in 2006. Also, in a notable coup in July last year, it closed the first-ever infrastructure fund focused exclusively on the Philippines. In the latter fund, MIRA was able to notch up another notable relationship with a local investor when Philippines pension fund the Government Service Insurance System (GSIS) made a material commitment to the vehicle, which closed on $625 million.

Asian pensions

“Asia is very important,” stresses Stanley. “You have growth, increasing industrialisation and the relative importance of these economies on the global stage. Plus, pensions in Asia are accumulating capital and want investment opportunities both within and outside the region.”

However, Stanley is keen to point out that Asian infrastructure investing is markedly different to its Western counterpart when it comes to aspects such as contractual frameworks, debt markets, sovereign risk and property rights. “You can have a very similar asset in North America, Europe and Asia but the risk profile in each region will be very different,” he says.

“And that’s why we offer regional products,” adds Stanley, cutting to the heart of another vital aspect of MIRA’s evolution. “Our investors see us as a global specialist with a very strong regional focus, providing opportunities that suit risk appetites or portfolio construction aims.”

In other words, amid the debates about strategy that tend to get a regular airing at industry conferences, MIRA has come down firmly on the side of global coverage through regional teams and funds rather than what Stanley describes as the “mix of different risks” that would be encapsulated by one diversified, global fund. “We’re not even global in the agriculture space,” says Stanley, half-smiling. “We have a livestock fund focused on Australia.”

This determination to isolate particular regions extends to the regional teams being “fairly self-contained”, says Stanley. “If someone is working on a deal they might ask an overseas colleague for advice or even pull in physical support, but we want them to be as self-sufficient as possible.”

While on the subject of possible overlaps, Stanley adds that the investment business at Macquarie is completely separate from the advisory side. “Macquarie has first-class infrastructure advisory capability and we might use them on some deals, as will the competition on others. But we’ll use the best adviser for the circumstances.”

He pauses before adding: “The advisory team was involved in the Mersey River Crossing project and the first I knew of that was when I read about it in the newspaper. That’s how much of a separation there is!”

Looking to history

As he looks to the future, Stanley is confident that MIRA’s record will stack up favourably against its competitors – and clearly feels that recent fundraisings have provided evidence of this.

“Since 2005, we’ve exited 37 deals,” he says. “Investors look at the team and the products, where the GP is investing and whether it fits the investment philosophy – but they will also look at what you have done historically and whether good results have actually been delivered. That’s an important aspect of capital raisings.”

He believes that infrastructure is a good space to be operating in and that this will continue to be the case for as long as the supply of assets continues to match demand. “At the moment you have trends like urbanisation in emerging markets and – in the West – industry unbundling, budget deficits, ageing populations and privatisations. All these things are driving deal flow and, as long as that continues to happen, it’s an attractive asset class.”

But there’s one last aspect of evolution that Stanley refers to, and it has to do with building up the “RA” in MIRA. “The development of our business across the real asset platform is very important. Infrastructure will remain an important element but we want agriculture, food, real estate and energy to be important too.”

He continues: “What we’re really about is long-term capital aimed at long-term assets. So we intend to be strong and successful in infrastructure with much more depth in Latin America and Asia and a strong platform in real estate, energy and food.”

It may have been challenging, but Stanley has risen to the challenge of describing his firm’s past, present and future rather well.

 
Chris Leslie (chief executive, Macquarie Infrastructure Partners) on the US market:
“An increasing number of US states, cities and agencies are quietly going about the process of systematically integrating private infrastructure. Many states are now procuring multiple projects simultaneously, often through a dedicated agency, illustrating a systematic approach and maturity which was not evident five years ago. Despite the hype, we see significant and increasing deal flow and greater sophistication throughout the market.”

Arthur Rakowski (head of private placements, EMEA) on the fundraising environment:
“The good news is that the market is growing strongly. There is ample evidence of both new investors and increasing allocations among existing ones. Whole countries and regions seem to be coming on line, witness the material contribution of German and Asian investors to a number of recent infrastructure funds. While the much-heralded drift to direct investing is real for a small proportion of large, sophisticated and well-resourced investors, many potential direct investors are choosing managed fund vehicles to secure access to co-investment opportunities as well as execution and management skills.”

MIRA: Fast facts
First managed infrastructure fund: Dec 1996
Total assets under management: $101bn (114 portfolio businesses, 300 properties and 3.6m hectares of farmland
Focus areas: Infrastructure, real estate, agriculture, energy
Global offices: 28
Key executives include: Martin Stanley (global head, MIRA); Edward Beckley (head of Europe and Middle East); Ben Way (head of Russia and North Asia); Frank Kwok (head of Southeast Asia and Australia); Graeme Conway (head of Americas); Chris Leslie (CEO, MIP); Tim Hornibrook (head of agriculture); Matthew Banks (head of real estate); Arthur Rakowski (head of private placements – EMEA)
Source: MIRA