‘Cost of equity shootouts’: Not for us

What is the most attractive area of investment right now for investors: Unlisted infrastructure, listed infrastructure, direct infrastructure or debt infrastructure?

MP: All these investment options have different risk-return trade-offs that need to be considered with reference to each investor’s investment objectives. The main considerations are: return and risk, liquidity requirements, diversification and volatility, and the investment timeframe. These considerations help determine which investment options to invest in and what the composition and relative weightings within an infrastructure or total portfolio should be.

An investor with an allocation to infrastructure of less than $250 million to $500 million is likely to consider a fund or hybrid investment strategy against just direct investments. The cost of managing a portfolio of direct investments is likely to be prohibitive for this portfolio size. Additionally, if the investor wants investment with meaningful governance rights (i.e. board representation to make their investment more marketable) as well as diversification, a small portfolio will severely limit the scale of the assets in which the investor can invest in directly.

Direct investments are more likely to suit investors with an infrastructure allocation of $1.5 billion or more, depending on the investor’s objectives and desire to internalise asset management and acquisition. In our view, an allocation of this scale is sufficient to ensure investment with governance rights across a meaningful diversity of assets, sectors and jurisdictions.

In between these investment sizes is an option of growing relevance to mid-size to larger investors: a customised investment mandate. A customised mandate is essentially a hybrid approach – assets are managed externally by a well-resourced fund manager, but the investor can retain the level of control they choose over portfolio construction, investment horizon and liquidity. Customised mandates can therefore provide a balance between direct and fund investing.

Infrastructure debt is increasing in popularity, as evidenced by the number of infrastructure debt funds that have been launched in the last two years. Infrastructure debt has a lower risk profile, lower returns and usually higher yields than unlisted equity. It is often considered part of a fixed income allocation rather than as part of the infrastructure allocation. Investors with a higher need for shorter-term liquidity may prefer debt investments (which will have a defined maturity) or listed equity. In both cases, however, investment characteristics differ from unlisted infrastructure equity.

Which sectors and geographic regions are expected to present good investment opportunities in the next 12 months?

MP: This is a question we consider regularly. We think of sectors and geographies as a matrix which we then assess against three criteria:

• What are the sectors and geographies that meet our clients’ investment objectives and/or which would complement our clients’ portfolios? Our team has specialists who focus on three broad infrastructure sectors: transport, utilities and social/concessions. This allows us to have a deeper understanding of value, key drivers and market trends by sector.
• What sectors and which geographies would provide the opportunity for us to make attractive investments for our clients? We include in this an assessment of our relative advantage in the opportunity and the level of competition for it. We also critically assess regulatory and financial risk to ensure that these can be priced into the transaction.
• Will the macroeconomic outlook, especially for key economic drivers for infrastructure assets, be favourable? We recognise the irreducible uncertainty in economic forecasts and investment cycles, so we assess our investment plans through various in-house developed scenarios for our existing investments and new acquisitions.
The past 12 months have seen a high level of activity in both the Australian and European markets. Core infrastructure, such as regulated assets and lower-risk transport assets in stable OECD countries, has been heavily sought. We are therefore focusing on opportunities in sectors where we have deep sector knowledge, or a competitive advantage either through existing investments or through disciplined execution. Sale processes with more complicated transaction structures, involving a tight timetable, or with extensive financing requirements, tend to restrict the field of bidders and elevate the transaction beyond a simple “cost of equity shootout” and this suits us given our experience.

We are focused on transport, utilities and social/concession infrastructure globally with preference for core and core-plus infrastructure. We are particularly active at present in the toll road and car park sectors.

In roads, we are the second-largest toll road investor in Australia, with Queensland Motorways being our largest investment. Queensland Motorways was privatised in 2011 and comprises brownfield established toll roads with a significant operating history and high certainty of CPI-linked cash flows. We are actively assessing a number of additional toll road opportunities where there is a need for them to be sold as part of a recapitalisation.

In car parking, we believe that defensive demand generators such as universities, hospitals and, in some instances, on-street metering concessions and transit system parking concessions, offer lower-risk investment opportunities. In North America, we have developed an exclusive arrangement with our operator at the Ohio State University car parking system to work together on upcoming concession opportunities. We are also seeing opportunities in Australia and Europe but risk profiles vary significantly between assets and geographies, requiring careful consideration.

Going forward, will investors be increasing, decreasing or maintaining their level of investments in Infrastructure?

MP: Overall, we believe investors will be increasing their level of allocations in infrastructure. However, this varies by market. In some markets, for example, the US and Asia, there is potential for significant growth as pension funds and sovereign wealth funds increase their allocation to infrastructure. We have in the last 12 months seen increasing allocations from US funds and stronger interest from sovereign wealth funds. Overall, the relative downside robustness in times of uncertainty and the expected low interest rate environment will lead to a greater appreciation of the investment features of good infrastructure investment and, therefore, to increased allocations.

Matina Papathanasiou is Sydney-based deputy head of global infrastructure at QIC

About QIC

Established in 2006, QIC Global Infrastructure (QIC GI) is a leading provider of unlisted infrastructure investment solutions to superannuation funds and other institutional investors. As at 30 June, QIC GI had committed approximately A$8.2 billion on behalf of clients across 22 investments and 11 geographies across the utilities, transport and social infrastructure sectors.

In April 2013, QIC GI on behalf of clients acquired 100 per cent of Epic Energy, which comprises the Moomba to Adelaide Pipeline System. This is a 1,184-kilometre gas pipeline connecting the highly prospective Cooper Basin gas fields with markets in Adelaide and other regional centres in South Australia.

In September 2012, QIC GI on behalf of clients acquired a 50-year concession to operate the parking system for The Ohio State University. It is the third-largest public university in the US with over 56,000 students and 26,000 employees spread across a 1,762-acre campus with spaces for 36,000 cars.

In 2011, QIC GI on behalf of the Defined Benefit Superannuation Fund acquired Queensland Motorways from the Queensland government. Queensland Motorways Limited is the owner of the Gateway and Logan Motorways in south-east Queensland, comprising 62km of key strategic transport links in the Greater Brisbane area. The roads link the trade precinct of Brisbane Airport and the Port of Brisbane with the southern and western residential areas of Brisbane, and provide a key crossing of the Brisbane River.