A tailored approach

Californian pension fund CalPERS created quite a stir when it announce late last year that its preferred way of investing in infrastructure in the future will be through separately managed accounts.

In a world dominated by blind pool infrastructure funds, it is sometimes tempting to see bespoke structures like separate accounts, co-investment programmes or direct equity partnerships with developers as a fundamental reaction against the blind pool model – a reaction often motivated by cost considerations.

That is until you meet someone like Graham Matthews, founding partner and chief investment officer at Australian manager Whitehelm Capital, who not only pioneered separate accounts, but has been doing nothing but separate account investments for the past 18 years, and you realise bespoke investments have been at the heart of infrastructure from the very beginning.

“We started investing in infrastructure 18 years ago with our first client, Australian pension fund MTAA Super, who remains our client today. At the time, it was all new so we couldn’t just fit infrastructure into a portfolio optimisation model, because there were no long-term return and risk attributes to do that. It was very much a case of working with those investors to find out what their long-term investment needs were and matching them with assets we thought would fit well into their portfolio,” recalls Matthews.

Matthews joined Whitehelm – then known as Access Capital Advisers, before its 2014 merger with Challenger’s infrastructure business – in 1998, just when the Australian government was about to embark on a transformational privatisation wave that would kick-start the infrastructure asset class.

So when MTAA Super approached Whitehelm, Matthews, who had a background in long-term economic forecasting and tax policy, with stints at the Australian Federal Treasury and the International Monetary Fund, used his expertise “to evaluate the long-term value of the cashflows these assets were going to generate”.

“Once we came up with a relative view of those infrastructure assets and how they compared to the long-term value of property assets and broader listed equities and the risk attributes of bonds, we concluded this was going to be a really interesting way for pension funds to get access to long-term cashflows in a way that wasn’t available in the market.”

The significant thing about infrastructure, which was as valid 18 years ago as it is today, was the way it straddled the portfolio divide between traditional defensive assets, which came at a cost to a portfolio’s returns, and growth assets like liquid equities, which are driven by what is happening in the domestic and global economy.

“In infrastructure you have something in between: it gives you the benefits of growth without being closely linked to economic cycles and drivers, but it also has defensive characteristics. It was that mixture, which applies today, that we could see as a very powerful way for institutions to diversify away from the listed equity bet some pension funds needed to take to generate returns,” Matthews explains.


Still, starting with separate account investing as the best way to figure out how MTAA Super would invest in the Sydney Eastern Distributor toll road – Whitehelm’s first deal – and sticking with it for nearly two decades and £4 billion ($5.8 billion; €5.1 billion) of investments are two very different things.

“It comes down to our philosophy, which is based on forming partnerships with investors and taking a very value approach to investing,” Matthews begins. “If you have a blind pool [fund] you have to invest no matter what point you are in the economic cycle, which makes it very difficult to reconcile with our investment philosophy.

“One of the advantages of separate accounts is that they are flexible, so we can tailor contractual terms. Generally, separate accounts will have five-year terms and we’ll then seek to renew them after that, as long as we are performing as a manager. Historically, because we have deep relations with investors, they have wanted to continue once you hit that five-year mark. But if they choose not to, the assets are theirs – and that’s an important difference compared to a blind pool fund.”

Another important differentiator, Matthews argues, is that investors control the investment parameters. “You have a portfolio plan that sets out the parameters for investing, defines what infrastructure is, what sectors and geographies investors are interested in and then sets parameters around inflation exposure, economic growth exposure, core versus core plus, interest rate sensitivity – a whole range of things that can be tailored,” he says.

That protects investors against one of the key risks Matthews sees in today’s infrastructure investment landscape: manager drift. “A lot of people now talk of infrastructure-like or infrastructure-adjacent – that just means it’s not infrastructure. With a separate account that can’t happen because the investor actually controls the parameters for the investment universe.”

Separate accounts are also a no-brainer “for investors who want more control over what they invest in, so all the assets fit within their portfolio, but want to pay less fees,” compared with a blind pool fund.

Costs are kept low, Matthews explains, for two reasons: “One is scale, as separate accounts meant each of the underlying investments were larger for the investor. That’s not so much the case these days when you have the Global Infrastructure Partners of the world raising multibillion dollar funds. But the other important part is we are 70 percent employee-owned, so we don’t have this huge bank bureaucracy or whatever sitting behind us that we need to feed. So it’s a lower cost solution to the investor because our cost base is also lower.”

But what happens if all your clients are gunning for the same asset? In a blind pool fund, everyone gets access to the assets purchased.

“It’s very unusual to have an asset that fits the requirements of all our investors. In some cases, we have assets that meet the needs of more than one. The Worsley Cogeneration Plant, for example, suited three of our investors, but not the others. If we find ourselves in a situation where there is more demand for an asset that exceeds the needs of that asset then we basically scale everyone back proportionally,” Matthews explains.

He continues: “We also have an allocation policy, which I wrote a decade ago, that establishes that if, in scaling back, one of the investors ends up with a sub-economic amount, then our investment committee can allocate that asset to a smaller number of investors. But the proviso is that next time that happens, the investor who missed out gets preferred treatment. In the 10 years since I wrote that policy, we’ve only had that happen once.”


Separate accounts also allow Whitehelm to be especially nimble when it comes to its investment strategy.

“Our first few investments were in unlisted equity [Sydney Eastern Distributor and Adelaide Airport] in 1998-99, our first listed investment was in Macquarie Infrastructure Group, also in 1998-99, and our first debt investment was in 2000 [Loy Yang Power Station]. We essentially started doing everything at the same time and that’s because some of our separately manged accounts have the ability to invest anywhere in the capital structure, some are just unlisted equity, others debt and others a mix,” Matthews recalls.

“That basically reflects our value proposition,” he continues. “We start out looking at an asset, stripping away the capital structure and asking: do we like the asset? And do we think it will generate sustainable cashlows over the long-term? If we like it, we then look at how we can invest in that asset. It’s not like if we like an asset we have to buy [into it] as unlisted equity. We see whether the best relative value is in senior debt, junior debt, unlisted equity or listed equity – we’ve done that consistently from the start.”

That explains, for example, why Whitehelm is making a killing with its debt strategy, which, at 14 percent returned, tops the 12.7 percent return being generated by its unlisted equity portfolio. “We have a very strong track record in infrastructure debt. Part of that was the result of the investing we did in 2010-11, at a time when global capital markets were dysfunctional, so it was an opportunistic play. If you look at 2009-11, we were able to buy into assets at material discounts to par, because they were undervalued, and subsequently sell them when they traded back up. We don’t expect those historical double-digit returns to continue,” he admits.

Still, Matthews sees a lot of relative value in infrastructure debt these days, especially in the junior debt space, where Whitehelm says it can “secure infrastructure assets with a 400 to 600 basis points margin over swap rates in a preferred position in the capital structure compared to equity, but generating returns that aren’t that different and in some cases might turn out to be higher than equity”.

The other area of focus for Whitehelm, especially on the unlisted equity side, is the mid-market, which Matthews defines as anything with an enterprise value of up to $1 billion. “We don’t want to pay 25 times EBITDA for the big trophy assets. In the current market, the winners of those assets are going to almost certainly be long-term losers because they’re just going to pay too much,” Matthews argues.

His main problem with some of the prices being paid today is what he sees as the fundamental mismatch between accepting a lower return and needing strong growth in the business to justify high acquisition multiples.

“You just can’t make enough changes to justify that price,” he contends. “For a 25 times multiple to add up, a 6-7 percent return needs to be coupled with very strong cumulative growth in the profit of the business. It’s that combination that I don’t think makes sense, because the world that supposedly generates low inflation and interest rates forever is not a world that can generate strong growth in business plans.”

The flipside to that, though, is that the mid-market has become such a buzzword these days that one wonders how long it will take before it is as saturated as the large-cap end of the market. Matthews, though, is still bullish on it, despite the increased chatter. “In Europe, in particular, there are just so many potential mid-market transactions here – more rocks to pick up and look under,” he concludes.


Which bring us to Matthews’ recent relocation to London and what that means for Whitehelm’s future plans. Perhaps because of the increased number of opportunities Matthews just mentioned, it’s unsurprising to see Europe edge out Australia, New Zealand and Asia as the firm’s top investment destination.

As Graham recalls it: “We started off investing in Australia for Australian investors because that’s where private ownership of infrastructure started. But in 2003-4, we started to see better value opportunities offshore, as competition in the Australian market increased. So it was purely from a value perspective that we’ve decided to head offshore. Our first investment was in the UK, in 2004, in [telecoms company] Arqiva and it then accelerated quite quickly.”

The second part of that European expansion is in full swing right now, with Matthews trying to grow Whitehelm’s separate accounts base from 10 to 15, targeting European investors. The firm currently has £2.2 billion in funds under management across the globe.

“We do have a couple of clients here, but our base is predominantly Australian and we want to expand that with probably another five relationships,” Matthews explains. “Germany, Switzerland and the Nordic countries tend to have investors who want that greater level of control. We are also seeing some interest in the UK. Those are countries that stand out.”

With demand for separate accounts growing across the globe and Whitehelm’s core business in such seemingly good health, we could not resist leaving Matthews with one last, slightly cheeky question: would Whitehelm ever raise a blind pool fund? Matthews laughs. “We have thought about blind pool funds over the years and may well do that in some specific sectors. But our mainstay will always be separately managed accounts on the unlisted equity side.” ?