Diving into the big pond

There’s a couple of things that are hard to place about Boe Pahari. The first one is the man himself: it took a good 20 minutes for AMP Capital’s new global head of infrastructure equity to sit down and start his interview with Infrastructure Investor, busy as he was concluding a phone call of visibly urgent importance about “exciting new business”.

The second one is his accent – made up of a subtle Australian and classic English base spiced up with Indian and American undertones. The blend owes a lot to his international background: the son of a successful academic, Pahari grew up in Kolkata and studied in Sydney before embarking on a career that took him to Asia, New York, Vancouver and London.

These traits chime well with the current mood at AMP Capital. Already a strong player on its home ground, the company is embarking on a journey to acquire the international heft it thinks it is due. “We have been in the infrastructure investment business for 25 years. We are well positioned to take our offering to our global client base and increase our activities significantly beyond the current level of $7 billion of assets,” Pahari argues.

One reason why other big names have until now gained greater prominence, he notes, is that the company has long been rather conservative – albeit “in a good way”. “While others have had quite a bit of turbulence, it’s been rather smooth sailing for us. We’ve supported our clients. But now infrastructure is seen within AMP as one of the most prominent of our global businesses and, as the firm expands, the asset class is key. We have the capabilities to attract a lot more co-investment and a lot more assets under management.”

It’s not as if AMP didn’t already have an international ambit. While the $140 billion asset manager is 85 percent-owned by AMP Group, a 166-year-old life insurer and one of Australia’s largest, the remaining 15 percent belongs to Japan’s Mitsubishi UFJ Trust and Banking Corporation (MUTB). The company has also formed an asset management joint venture with China Life through which it targets the Chinese pension fund market. These associations, Pahari explains, are three “very strong” pillars for the business.

Out of AMP’s 50-plus infrastructure equity investment staff, about half are based in Australia, with the balance spread across London, New York and Delhi. Aside from separate managed accounts (SMAs), the team looks after an array of pooled funds: an aged care business, a public-private partnership fund and a core-to-core-plus vehicle in Australia; and the Irish Infrastructure Fund, in which Ireland’s sovereign wealth fund is a cornerstone investor.

FLAGSHIP FUND

Yet “the fourth pillar”, Pahari says, “is AMP’s international expansion beyond Asia into the global pension fund market”.

This ambition is not taken lightly by the firm. The shift in emphasis saw Scott Davies, formerly AMP’s Australia-based global head of infrastructure, leave at the end of last year; meanwhile Pahari, previously head of infrastructure for Europe and the Americas, was appointed to his current role. “There was a realisation that Europe was very much where a lot of our growth opportunities would come from. Most of our competitors have their head offices in the UK. So the firm decided to shift senior management resources to London.”

The leadership reshuffle continued this year, as the company moved from being organised along regional lines to focusing on sectors and products. Paul Foster, former head of infrastructure for Australia and New Zealand, departed, and the role of head of infrastructure for Europe and the Americas, left vacant by Pahari’s promotion, was not filled. “If you truly want to be one global team with one global platform, limiting the regional emphasis makes sense,” Pahari says.

Two other executives left the company, while Michael Cummings, Julie-Anne Mizzi and Michael Bessell were bumped up to lead a reduced number of divisions. AMP’s global infrastructure equity leadership team, which regroups all the heads of products and functions, now counts a total of nine executives.

But as far as internationalisation is concerned, AMP’s flagship asset lies elsewhere. “We are a fund-led business and we will lead with the global fund. It will generate opportunities worldwide and capture the imagination of our clients. And as the fund leads, we will be offering further opportunities for investment to our co-investors and SMAs, which we will then back with very strong asset management.”

Pahari refers to the Global Infrastructure Fund (GIF), a vehicle he was instrumental in creating through converting the firm’s 10-year old Strategic Infrastructure Trust of Europe (SITE) from an open-ended fund to a closed-ended structure. GIF’s remit was also broadened to encompass Australia, Europe and North America, Pahari says, with an allocation to emerging markets “for the sake of completeness”.

DEEP MARKET

SITE’s existing assets, which comprise $750 million worth of infrastructure investments, serve as a seed portfolio for the global fund. The firm is hoping to top them up with $1.25 billion of fresh capital commitments, bringing GIF’s total size to “at least $2 billion”, Pahari explains.

Having started its marketing efforts in September, the team went some way towards achieving its target through reaching a first close last March after raising $540 million. Asked why the firm did not wait a bit longer before holding a close – with about $800 million still remaining to be collected – Pahari says the milestone was seen internally as a meaningful one.

“We felt that a close at 40 percent of our $1.25 billion fundraising target was a very good one. Most people would be happy with 20 or 30 percent. And remember that our assets are valued on an independent basis every six months, so unless you close, the new clients coming in are not going to benefit from the valuations that exist today.”

At this point a broader question emerges: why did the firm feel it necessary to convert its existing structure to a closed-ended one? Pahari’s answer is twofold. “Our existing clients came into our open-ended fund because they wanted diversification. But we were able to demonstrate that actual diversification would come through getting more cash and more assets via a closed-ended structure.”

Legacy investors in the fund now have the choice between keeping to a European exposure and expanding their horizon to global markets. “SITE investors originally gave us a mandate to invest in Europe. We wanted to minimise any disruption to the mandate they gave us.” In reply to suggestions that some of them might have preferred to keep their money in an evergreen structure rather than see it come back after a decade, Pahari says that 92 percent of investors voted in favour of the conversion – hinting that AMP’s communication efforts proved fruitful.

But the case for switching fund structures, at its heart, was about recruiting new investors. “We noted that open-ended funds were not the preferred model in the US and Europe. The global pension fund market is what we are looking at and we needed a product that was appreciated and adopted by it.” And what better way to attract new limited partners, he adds, than being able to offer a closed-ended fund that’s already been 40 percent deployed.

“New investors are circumspect about coming into a classic blind pool. Here, they can due diligence the fund’s existing assets and buy them without incurring further bid risks or costs. This eliminates potential single-asset fund issues and mitigates the J-curve effects you normally get when investing in closed-ended structures.”

Existing limited partners in SITE include Australian, Japanese and European investors. Pahari says fresh capital came from Asia as well as from US, Canadian, Irish and Belgian institutions. He has no doubt pools of capital in America and Europe are deep enough for AMP’s offer to find further takers. “The European pension fund market is quite deep and less consolidated compared to Australia and Canada. Australian super funds already have allocations of 10 percent-plus to infrastructure, whereas in Europe the average is 1 or 2 percent and growing. In the US the allocations are small but growing as well.”

PLENTY OF FISH

The existence of such a deep pool of potential investors is what drives AMP’s eventual ambition: to double its funds under management within a four- to five-year time frame.

Such abundant liquidity, however, could also lead one to believe that the hard part is less about raising the money than deploying it successfully. Pahari acknowledges that today’s fund managers operate in a highly competitive market. “Infrastructure is a defensive asset class with the most aggressive competition.” But he reckons AMP has what it takes to invest its dry powder in a timely fashion.

He says AMP doesn’t intend to be a “me-too” player, meaning that its strategy is not about “doing cost-of-capital shoot-outs”. Instead, the company intends to focus on the mid-market, looking for deals that are attractive “in terms of both the process and the overall outcome”. In practice, he says, that implies staying disciplined around pricing while also trying to be open as to which geographies and sectors the fund targets. “We want to be innovative enough to include looking at niche plays. Our strength in aged care is rather unique, for instance.”

He’s particularly fond of the transport sector. “The way the world is headed it’s time to think about GDP-related assets to the tune of 50 to 55 per cent of any large portfolio. And we’re one of the few players in sectors like airports that can really make a difference – not just in terms of ownership but also in terms of operating leverage.” AMP is a shareholder in Newcastle and Melbourne Airports, and also has some exposure to smaller hubs in Australia.

Pahari seems less keen on utilities, a sector where he thinks the entrance of direct investors has pushed valuations to sometimes unreasonable levels. “The way pricing has gone you risk not fully valuing the operating and regulatory risk associated with utilities. As such you could be giving up the upside and preserving the downside. Having said that there are utilities where there are efficiencies to be gained.”

He emphasises that finding the right transactions is a painstaking task, one whose success relies on the “ability to understand the right transactions”, along with an extensive personal and professional network, deep sector expertise, talented people inside the organisation and expert advisers outside it.

Few would disagree with him on these counts – but how good has the company been at harnessing its strengths in practice? Here again, Pahari is not afraid of using superlatives. “There’s no question infrastructure is a complex business. But we’ve demonstrated we’re very good at it and I think we’ll do it even better.” He points to the overall track record of AMP’s global OECD brownfield strategy, which over 25 years has produced a 15.6 percent internal rate of return (IRR) and a 6 percent cash yield.

GATHERING STEAM

Scanning through GIF’s existing portfolio provides a more nuanced view. The fund counts as seed assets Angel Trains, which Pahari describes as the largest of the UK’s three big rolling stock leasing businesses (ROSCOs) and a strong performer both in terms of cash yield and returns. “There will be 16,000 new trains by 2043 and Angel will participate in that in terms of new concessions.” The £2.5 billion (€3.5 billion; $3.7 billion) sale of rival ROSCO Eversholt earlier this year, a lucrative operation for its former shareholders, suggests AMP placed a skillful bet when first backing the company in 2008.

Pahari is also enthusiastic about Alpha Trains, Angel’s counterpart in continental Europe. The company derives 40 percent of its business from cargo transport, which he believes can give “good results” when the economy gathers pace.

Another highlight in GIF’s portfolio is Newcastle Airport, the largest in north-east England. Pahari explains that AMP has worked a lot to develop the retail side of the business, taking inspiration from its expertise in shopping centres (in which the firm is invested through its real estate unit). It had previously implemented a similar strategy at Melbourne Airport.

“That’s another strength of our business. When you buy AMP you don’t just buy a product, you buy the whole house. We will work across our units to cross-pollinate and generate new ideas through our culture of the Unified Investment House.”

SITE seems to have been less lucky in its timing when it backed CLH, a Spanish petroleum pipeline, in 2008. “We’ve had some difficulties with the asset due to the economic crisis in Spain, and we’ve suffered some reduction in value. But I’m happy to say those days are behind us.” He says the company, located in one of Europe’s largest economies, is very well run, with strong cost discipline and international aspirations.

And then there is Thames Water, in which AMP invested in 2006. While Pahari acknowledges the UK’s largest water utility has gone through a period of “settlement”, he expects the company to perform well from now on. He agrees that the UK water regulator’s latest price review, which last December promised a 5 percent cut in customer bills over the next five years, will have an influence on the company’s performance. But he is confident Thames Water will deliver the returns it targets.

“It is an important asset for the community and for the country so you have to expect there to be this sort of impact. But the UK government also realises that for private capital to stay, these assets needs to remain sufficiently attractive. We just need to adapt to the new environment and I think we’re adapting reasonably well.”

GIF, which Pahari expects will reach a final close during the first quarter of 2016, has a five-year investment period. Because the fund is already 30 percent invested through pre-existing seed assets, however, he says the company is in no rush to deploy all of its cash overnight. “When you invest with us you’re investing with people who are not anxious to put money out.”

The fund is intended to be the first of a series. Pahari reckons its successors will grow bigger generation after generation, but that the company will remain disciplined when sizing its fundraises. “We want to make sure we don’t put pressure on ourselves and stay focused on client returns and solutions.” Worth noting is that GIF2, which Pahari anticipates will come to market within two to three years, won’t benefit from the head start GIF currently enjoys. By then, however, the hope is that the track record built by the fund will pull investors in without the need for additional sweeteners.

“The changes we’re going through are all about unleashing the fantastic engine that AMP Capital is, uninhibited by dated structures and regional barriers,” Pahari concludes. “Our company is a very old house – we need to balance our strong traditions with an approach that is at the same time considered, competitive and aggressive.”