Australia: Still top of the tree, but wobbling

When Melbourne-based fund manager IFM Investors paid more than $5.7 billion for a concession to operate, maintain and collect revenues from the Indiana Toll Road in March, a couple of questions were quickly posed.

One was whether the deal was symptomatic of infrastructure’s perceived asset price bubble? After all, unconfirmed media reports suggested that one of the under-bidders on the transaction was offering a hefty $1 billion less than IFM. For its part, IFM claimed the asset “represents a rare opportunity to acquire a large, high-quality, US-denominated transportation asset, giving our investors direct linkage to US GDP and CPI”.

But whether or not the price paid represented a good deal, a second question was just as pressing. Given the so-called wave of privatisation deals in Australia, why was IFM choosing to splash its cash in the US?

IFM chairman Garry Weaven provided a clear enough answer when telling ABC: “IFM has been for a long time investing in infrastructure in Australia and, in the last several years, has been putting a lot more effort in offshore, simply really because of the lack of available deal flow in Australia and the quite substantial demand from our Australian clients for infrastructure investment.”

Now for the next question: Why then would we choose Australia as our hottest global market? The answer is relatively easy…but less easy than it was last year when Australia also took the crown. It remains the case that Australia represents a richer source of deal flow than any other market – and allows the larger, direct investors in particular to put significant amounts of capital to work.

No deal better exemplified this than last year’s deal which saw QIC sell Queensland Motorways to a Transurban-led consortium that included Australian Super and Abu Dhabi Investment Authority for A$7.1 billion (€5.1 billion; $5.4 billion). Now, investors are licking their lips in anticipation of a huge pipeline of government asset sales – which was once tipped to be worth more than A$100 billion.

We say “once tipped” because recent events have diminished the anticipated feast. The recent surprise election outcome in Queensland saw a possible A$37 billion of deals taken off the table. With New South Wales going to the polls imminently – and with sales of ‘poles and wires’ assets part of a political dogfight – there are fears that a similar result there could have even more devastating effects.

Furthermore, in Victoria, recently elected Premier Daniel Andrews appeared willing to consider legislating to prevent the payment of compensation to the consortium which won the contract to build the East West Link – the multi-billion-dollar toll road which the state government wants to abandon.

Media reports suggested compensation due was in the region of A$1 billion or more – though there were also reports that the consortium may be prepared to accept around half this. Either way, the association of Australia with a retroactive measure of this nature is potentially highly toxic.

ON THE CUSP

All this, taken together with Weaven’s remarks, made us pause for thought before once again making Australia our number one. However: Deals are being done, many more are anticipated (even though fewer than once imagined), and large capital pools have migrated to Australia to claim a share of the spoils.

In our view, Australia may be on the cusp of doing the unthinkable by throwing away its status as the undisputed magnet of global infrastructure capital. As has been frequently noted by asset class observers, these capital pools end not to be unswervingly loyal to any particular market – they will move to wherever the best opportunity arises. For the time being, that opportunity is Australia. This time next year, it may not be.