Hunting for sector trends

Q: Abu Dhabi Investment Authority’s (ADIA) infrastructure team was created in 2007 just before the start of the Financial Crisis. What was the strategy at that time and are you satisfied with how the portfolio has performed to date?

JM: When the mandate was created, our primary focus was very much on direct investing in core markets. That is still the case, although this focus is evolving, and we are now looking at a broader range of opportunities across more markets. In many ways, the biggest change since the Financial Crisis has been the market conditions in which we operate.

During the first few years there was a relative scarcity of capital, even for high-quality assets, which coincided with a time when we were looking to deploy funds and build a balanced portfolio. The market has since normalised and competition has increased, but our portfolio has performed above our benchmark returns and now provides us with a solid base to diversify into new markets and opportunities.

Q: ADIA continues to build its in-house management capacity. How has the approach to infrastructure investing changed since your appointment as global head of infrastructure in 2013?

JM: ADIA has a very flexible investment mandate appropriate for a government-owned fund with a long-term outlook. Within infrastructure, we prefer direct investment, which allows us to implement our own acquisition and asset management strategies. However, the flexibility of our mandate means that we are also able to invest in listed securities, debt, and through third-party managers, if the opportunity is sufficiently attractive.

In addition to core markets, we also target emerging markets globally, across many sectors and in both brownfield and greenfield assets, so it is critical that we leverage a strong network of partnerships with other financial investors and industrial groups.

The team has grown in line with the portfolio, and we will be looking to recruit further as the scope of our activities broadens. We’re fortunate to have a very strong group of professionals in place, with an extremely diverse range of experience and cultural backgrounds – of the 20 or so people in the team, we have 13 different nationalities and backgrounds ranging from investing and advisory to direct experience of working within infrastructure operating companies. When you couple this with ADIA’s significant capital base, the breadth of our mandate and established relationships, we think it’s a compelling story for potential new recruits.

One recent change has been to reorganise ourselves from a geographically-focused origination model to a global sector-led approach, which allows us to dig deeper into sector trends, reinforce client coverage and optimise our internal resources and the way we interact with, and leverage the knowledge and relationships of, other ADIA investment departments.

Q: How has the landscape for infrastructure investing changed since ADIA entered the space, and how do you see it further evolving? Has the role it plays in ADIA’s portfolio changed?

JM: The market today is far more competitive than it was in 2007, partly due to the demand for higher-yielding assets by financial investors everywhere, but also because of the growing acceptance of infrastructure as an asset class in its own right. Our response is to maintain strict discipline in how we value opportunities, while also looking at new opportunities outside our core areas of focus.

The role of infrastructure in ADIA’s broader portfolio hasn’t changed markedly over the years. It has unique characteristics that allow for relatively stable, predictable returns over a long timeframe, and this fulfils an important diversification role for the portfolio as a whole. But, as with any new asset class, our understanding and appreciation of the nuances of how it performs have evolved, and we monitor events in the industry closely to ensure that emerging risks are identified and factored into our pricing.

Q: Is co-investment/club investment ADIA’s primary strategy? What are your criteria for an ideal partner?

JM: When it comes to direct investing, our preference is to partner with local institutions, as we believe this enhances our ability to mitigate certain risks over the longer term. There is no such thing as an ideal partner for every situation, but usually we will look to those with similar preferences regarding term, financing structure, governance and risk tolerance.

Having said that, we are in arrangements with other sovereign and pension funds, as well as insurance companies, strategic or industry investors, and infrastructure funds. There is no “one size fits all” given the different geographies and asset types that we target.

Q: Why does ADIA not seek controlling interests in infrastructure?
JM: Our preference is to work in consortium or partnership arrangements. But being a minority investor doesn’t mean being a passenger; we are still responsible for the risk we have acquired and the return we present to our investment committee. This requires us to be actively involved with our co-investors and with the management of the asset to ensure we are properly aligned.

If we want to be an effective global investor it is only logical that we acknowledge the strengths that others bring. There are many partners out there who have larger teams on the ground in a particular market or specific expertise that we can tap. Being very clear about our approach and particular skill-sets has allowed us to be a more effective partner and to build the quality portfolio that we have today.

Q: What about debt investment?

JM: Investing in infrastructure debt is seen as a natural adjunct to our current equity focus and is being analysed with a view to making it part of our allocation and investment strategy going forward.

Q: Will you consider investing through commingled funds or managed accounts – and why

JM: We are driven by absolute returns, the cost of generating these returns and the need to understand, value and manage risk. Against this background it makes sense to be a direct investor where practical while recognising our limitations. For this reason, there are markets or situations that are better approached through a different type of platform, be this a fund or a managed account, and we are comfortable using these selectively where it makes sense.

Q: While regulatory risk has always been a consideration in emerging markets, we have also seen more government intervention in mature markets over the past two years. Do you think this trend will continue? How will it affect your investment strategy? Is higher return expected to compensate the risk?

JM: It is important to distinguish between regulatory and political risk. The two can be interlinked, but the risk that is bigger and more difficult to mitigate is that which comes from a change of government or as a result of political expediency.

While political risk is perceived to have increased in recent years, regulation is generally better accepted and understood in stable markets where the regulator is independent. It is clear that regulation has become more nuanced as a result of economic uncertainty and fiscal constraints, but there is an understanding of the balance that regulators must strike between protecting the interests of end-users while attracting capital for investment.

There are periods when finding and maintaining this balance can create tensions, but these tend to be resolved over time. As an investor, we have seen the interplay of these forces and we naturally seek to quantify their impact on our expected returns, but we remain generally positive towards regulated assets in our portfolio.

Q: Could you share your views on the Australian infrastructure market? Do you view the domestic institutional investors more as partners or competitors?

JM: We have made a number of significant investments in Australia, with positions in three of the country’s biggest ports as well as toll roads and stakes in some listed companies, and it will continue to be important given the expected flow of opportunities forecast for the coming years.

Australia has a well-seasoned group of investors and advisors, which makes for a very transparent and efficient market. We are fortunate to have invested successfully alongside partners in a number of projects, which has allowed us to build a good track record and rapport with many parties. ADIA primarily views domestic institutions as partners, but ultimately a partner in one transaction can always emerge as a competitor in another. What’s critical is to take a long-term view and always behave ethically, fairly and in a consistent way.

Q: Besides the UK, the US and Australia, what other destinations are on your list of interesting markets and why?

JM: ADIA is a long-term player, which means that we approach infrastructure investing as a global endeavour. We are already invested outside the core markets of the US, Europe and Australia, and we continue to build our understanding and capabilities to identify and respond to opportunities in less-developed markets.

These include important regions such as Asia and Latin America and key countries such as India, as well as sectors that we feel have long-term potential. One of these is renewable energy, where advances in technology coupled with low labour costs in certain countries have opened the door to many interesting opportunities. Because of our long-term horizon, we are able to monitor these developments over time and ultimately invest on the basis that they will generate attractive returns within our risk parameters over a longer period than others may be willing to accept.

The same applies for greenfield assets, where our total return approach and long-term view makes us a natural investor.

ADIA: A snaphot

Established in 1976, Abu Dhabi Investment Authority (ADIA) is the largest sovereign wealth fund in the Middle East. ADIA does not publish its assets under management, although one recent estimate puts the number at $773 billion.

ADIA’s infrastructure assets are managed by a merged department of real estate and infrastructure. The department is responsible for 6 to 15 percent of ADIA’s assets, 5 to 10 percent accounting for real estate and 1 to 5 percent for infrastructure.

In infrastructure, it focuses on assets with strong market-leading positions and relatively stable cash flows, such as energy, water and transportation, among others. The primary focus is to acquire direct minority stakes alongside partners in core developed markets, particularly Europe, the US and Australia, although its mandate also allows it to invest in emerging markets and in a range of other asset types. It does not seek to control or operate the assets in which it invests.

Among its more high-profile deals, ADIA’s infrastructure team purchased 15 percent of London’s Gatwick Airport in 2009 from Global Infrastructure Partners (GIP), an infrastructure fund manager which bought the airport for £1.5 billion (€1.6 billion; $2.4 billion). And in April 2013, a subsidiary was in a consortium of institutional investors including IFM, AustralianSuper, Cbus, HESTA and HOSTPLUS that won 99-year leases for Port Botany and Port Kembla in New South Wales for a total acquisition price of A$5.07 billion.

Across ADIA as a whole, the largest target market is North America, where it invests 35 percent to 50 percent of its wealth across multiple asset classes. Europe accounts for up to 35 percent of assets, with developed Asia and emerging markets ranging from 10 percent to 20 percent and 15 percent to 25 percent respectively. Although it emphasises investment in developed markets, ADIA has had an overweight position in emerging markets for over a decade and remains positive on their relative growth prospects over the long term.

In May 2013, ADIA appointed John McCarthy, previously of RREEF Infrastructure, as its new global head of infrastructure.

Source: Infrastructure Investor Research & Analytics