For someone who spends a lot of his time jetting around the world, Andrew Day appears remarkably relaxed and jovial. By mid-year, the Hastings Funds Management (Hastings) chief executive will have made six overseas trips in 2014 from his Melbourne base to destinations as far flung as North America, Europe, India and Indonesia.
He confides that European travel has a happy connotation since it enables him to catch up with the older of his two sons, who is currently living in London. But, at the time of this interview, he is in Germany for Infrastructure Investor’s Berlin Summit – an opportunity to network with peers. Although he quips about the “grey hair” that he refers to as evidence of his constant globetrotting – together with the strain of running large and small companies in the public and private spheres – he gives the impression that travel is, to him, a rejuvenating rather than energy-sapping experience.
And maybe that’s just as well. In the two years since he joined the firm, Day has attempted to attach the rocket boosters to Hastings’ internationalisation. Launched in 1994 and celebrating its 20th anniversary this year, Hastings is a longstanding part of a proud infrastructure investing establishment in Australia. But as someone who has worked extensively in Europe – for example as chief executive officer of Eircom Holdings and chief executive and chairman of private equity-owned Truvo – Day appreciates why planting flagpoles around the world needs to be a strategic imperative.
UNDERSTANDING THE NUANCES
Explaining why he sought job opportunities in Europe, Day says: “Basically I was keen to gain a broader perspective. When you look on a map, you realise that Australia is a long way from anywhere. People in the business world there have fantastic expertise but they can sometimes underestimate the complexities in the rest of the world.”
Since joining the firm, Day has sought to bring his understanding of those nuances to Hastings as it seeks to grow both its investment activities and its investor base around the world. Recent initiatives and breakthroughs have been plenty in number. The two most recent are in relation to Asia and are fresh announcements at the time of the interview.
One is a new “strategic alliance agreement” with Indian conglomerate Aditya Birla Group through which a joint platform will be established for investment initiatives and opportunities in India. Hastings says it plans to develop a permanent presence in the country. The second is a fund that will invest in airports and which will be managed out of South Korea, where Hastings has already had an office for two years headed by Steve Song, a former Macquarie Bank divisional director.
Up until now, says Day, the focus for Hastings has been on “taking Asian capital and investing it in OECD assets. But in time, we expect a growing appetite to invest in emerging markets and we watch that with interest. From our Australian base, we have a geographic proximity to Asia and three of the four largest countries in the world are in the region with big populations and fast growth. It’s the next frontier and we’re keen to form partnerships based on trust and respect.”
In Europe, such a partnership has already been reached with the RBS (Royal Bank of Scotland) Group Pension Fund. The UK fund initially agreed to commit £750 million (€898 million; $1.2 billion) 18 months ago to a customised solution offered by Hastings. In August 2013, it invested alongside Hastings’ Utilities Trust of Australia (UTA) fund in the acquisition of Phoenix Natural Gas, the Northern Irish natural gas distribution and energy services firm, from Terra Firma. Around a month prior to this interview, RBS opted to increase the commitment to £1.25 billion for debt and equity investments across Europe and North America.
Hastings has several partnerships of this type with investors, although the RBS mandate is comfortably the largest. Day says the key to such arrangements is to “make sure we have a close association with the investor that’s very transparent. We seek opinions as well as provide guidance”. He points out that the partnerships are long term in nature (“we keep our investments for 20 or 30 years so we buy to keep not flip”). In this regard, Hastings can point to a track record of a 12.2 percent return on equity since inception. “Track record defines everything in this space,” Day notes.
As well as these partnerships, Hastings has two longstanding equity funds: UTA, which was founded at inception in 1994 and has invested in the likes of Australia Pacific Airports Corporation (operator of Melbourne Airport), Interlink Roads (operator of Sydney’s M5), and the UK’s South East Water; and 1998-vintage The Infrastructure Fund (TIF), which counts the likes of New Royal Adelaide Hospital, Sydney Desalination Plant and Texas’ State Highway 130 (segments 5 and 6) among its portfolio assets.
Until recently the firm had a listed infrastructure strategy based on three funds, which have all now been fully or partially exited: in November 2012, the Australian Infrastructure Fund (AIX) was sold to Future Fund for A$2 billion (€1.3 billion; $1.8 billion); the following month, the Hastings Diversified Utilities Fund (HDF) was taken over by Australian natural gas infrastructure business APA Group; and the firm is currently winding up the Hastings High Yield Fund (HHY) in a process expected to take approximately two years.
The listed infrastructure model doesn’t always create the right alignment, however. “Personally, I think infrastructure is better held in a longer-term, unlisted model that’s suited to the needs of unlisted institutional investors. We exited our listed funds with a really good return and it was the best thing both for us and for our investors.”
AND THEN THERE WAS DEBT
Having invested solely in equity for its first five years of existence, Hastings began investing in debt in 1999 with the launch of the Hastings Yield Fund. Since then, it has completed more than 50 senior and junior debt transactions in utilities, social infrastructure, airports, toll roads and seaports.
Helmed by global head Steve Rankine in Sydney, a key landmark in the growth of the infrastructure debt business came in 2012 when Tim Cable was appointed to head up the European business and Nick Cleary to oversee North American activities from New York. This was effectively Hastings’ response to the market opportunity that opened up with the departure of the banks from long-term infrastructure lending.
Having mentioned these appointments, Day finds himself back on his favourite topic of internationalisation – and, this time, he’s reflecting on the firm’s ambitions in North America. “We see North America as a very significant source of infrastructure capital and we see an increasing availability of infrastructure opportunities,” says Day. “Investment in infrastructure is not quite as developed as in Europe but there’s a good near- to medium-term opportunity.”
In February 2013, Irene Mavroyannis – the former KKR chief operating officer and First Reserve managing director – was hired as executive director and chief executive officer of Hastings Funds Management (USA). Then, in December 2013, Rob Collins, a former managing director and head of infrastructure for the Americas at investment bank Greenhill & Co, was appointed Hastings’ head of global investments for North America.
The hires, Day says, were designed to “give us broader access and expertise. It was a signal of our intentions”.
As it seeks to grow its investor base across Europe, North America and Asia, Hastings believes its model is a differentiator. It has investment teams operating across geographies and sifting the best opportunities; once assets are bought, they are run by a global asset management team headed by former UTA chief executive Richard Hoskins “with very clear processes and standardised approaches”; and then there are portfolio managers “who look after the capital pools and are responsible for returns”.
How the portfolio managers go about building their portfolios is an interesting aspect of the Hastings approach. Day describes it as a “risk-adjusted portfolio model” and explains how it works as follows: “You build it by looking at a range of criteria so that when you put together, say, five or seven assets they work collectively to reduce the risk. We introduced the model in 2003 to reduce the volatility of returns so that in periods of macroeconomic volatility we would be much more predictable than most.”
In other words, Hastings will look for the right blend of assets – for example by sector, level of maturity and geography – in order to provide investors with the level of return they are expecting. This means that the priority of the portfolio manager is selecting the asset (from the investment team) that provides his portfolio with the specific ingredients that it requires. “We don’t just look at the asset and at the price but at how it suits the portfolio,” says Day.
Asked about what happens when a ‘great’ asset comes along that might unbalance a portfolio, Day replies that “we’re unemotional. We’re not carried away by the thought of an ‘outstanding asset’. We put the asset through the model and through our governance processes and trust that that will give us the right result. There are no deals we have to do.”
‘ABILITY TO NEGOTIATE’
So, given that there are no deals Hastings has to do, what are the kinds of deals it likes to do? Day reaches for a couple of examples. In May 2012, alongside Canada’s Ontario Teachers’ Pension Plan, Hastings acquired a 50-year lease of the Sydney Desalination Plant in a transaction worth A$2.3 billion. In Day’s view, the acquisition of the privatised asset [Sydney Desalination] showed Hastings’ “ability to negotiate with both the Australian State government and with an external partner”.
The second is Phoenix Natural Gas, the Northern Irish gas distributor referenced earlier. The deal was done by UTA together with the RBS customised account, with the asset to be managed by UTA. “We had looked at it for two years and were comfortable with the management team and the track record. Because we understood the business plan well in advance, we knew the asset well by the time the auction came along,” explains Day.
Day is also keen to stress the opportunities that arise from assets that are already owned by the firm, which he thinks is not well appreciated as a deal source. “For example,” he says, “there has been a lot of expenditure at [portfolio asset] Perth Airport. Around half of our investment over the last 10 years has come through organic opportunities and they are assets we know extremely well and provide certain investment flow. It also means we can access investment opportunities no-one else can access.”
The whole investment team has a say in purchasing assets. Day says he sees Hastings as much more of a partnership culture than a hierarchical model, where joint accountability for performance exists. In order to encourage a “performance driven” approach, Hastings introduced a Long-Term Incentive Plan in 2011 through which 21 percent of the company is currently owned by its staff – with the possibility of this rising eventually to 30 percent.
‘LIKE AN INDEPENDENT’
The remaining stake is held by Westpac, the Australian bank which bought a 51 percent interest in Hastings in 2002 and then acquired the remainder in 2005. Day describes Westpac – one of Australia’s “big four” banks – as a “strong and supportive organisation”. He adds: “They are not involved in the investment decisions so it’s like being an independent.”
The bank has also aided Hastings’ international growth as well as being tapped for some of the firm’s leading executives: for example, infrastructure debt trio Steve Rankine, Tim Cable and Nick Cleary all previously worked at Westpac; as did director Andrew Faber, who worked on the Sydney Desalination deal.
With the clock now ticking and meetings beckoning, there’s just time to ask Day about a recent innovation – Hastings’ “investor day”, the inaugural version of which was held six months ago at the firm’s headquarters in Collins Street, Melbourne’s main thoroughfare. The event was designed to emphasise the firm’s appreciation of the need for alignment of interests.
“The CEOs of the operating companies came to speak to our investors so they could understand more about what the companies do,” recalls Day. “It was about joining the investors and the investments in order to ensure transparency and it will be an annual event from now on.”
The firm will be hoping that, if it can successfully communicate its message, these events will become populated with a growing number of investors. That, in turn, would vindicate Day’s determination to spread the word globally.
“The world is about cross-border capital flows and that’s why we have to be international,” Day reflects. One senses it won’t be long before he is boarding his next flight.