What makes a manager stand out from the crowd? It’s a tricky question in the context of an asset class having its day in the sun, with a rush of new investors putting pressure on managers to differentiate themselves at the same time as they are being asked to deliver on a certain set of expectations (steady yield from core-like assets preferably in OECD markets).
In that sense, you can’t accuse QIC – the Queensland-owned manager with A$82 billion ($64.6 billion; €53.7 billion) of assets under management – of playing it safe when it came to market with its first pooled infrastructure vehicle, the QIC Global Infrastructure Fund, which closed on its A$2.35 billon hard-cap in May 2017.
After all, it’s not every day that you see a manager attempt a less familiar structure, one that is open-ended from an asset-ownership perspective, but closed-ended from a capital-raising point of view. So, it won’t come as a great surprise to find that is the first thing we ask Matina Papathanasiou, co-founder and deputy head of QIC Global Infrastructure, which manages just shy of A$10 billion of investments, when we sit down with her at QIC’s London offices.
“We spent a lot of time in product development thinking about fund structures and there were a few themes we had in mind,” Papathanasiou says, referring to the 18-month product development process.
“We found clients generally don’t want to sell assets, which is what happens with closed-ended structures, so we didn’t feel that was the right structure. At the same time, there were quite a few open-ended structures around, but some of the feedback from investors was that they are open in perpetuity, which creates a challenge around valuations when you have new investors coming in. There’s also the question of when do these structures become too big?”
The solution was the hybrid structure QIC settled on, inspired by similar structures employed in its real estate funds.
“We are long-term owners of privileged assets, so you need to maintain your social licence to operate and be good stewards of those assets. That’s a different mindset.”
The firm’s approach clearly has its fans, with Hostplus head of infrastructure Jordan Kraiten comparing it favourably with Australian open-ended stalwart IFM Investors. “We also like [QIC’s] model, as it means our members will continue to benefit from the long-term ownership of Fund I’s assets and we can commit new equity to Fund II. Both models provide long-term benefits, but IFM will eventually have to make some hard decisions about the assets [it owns], because you cannot have a never-ending open-ended fund that just keeps growing and growing,” he told us over the summer.
For investors that want a time horizon closer to a traditional closed-ended structure, QIC offers a defined liquidity window at year 13, the first of a number of such events. That, according to Papathanasiou, helped convince some of the LPs among its 20-strong base that were used to more traditional closed-ended structures. “They understood the benefit of that 13-year liquidity window, which means they can potentially exit then.
“We have pension funds, insurance companies, defined-benefit funds, so they all have different investment profiles. Some are liability matching; others are looking to maximise returns. They will all decide [when to exit] depending on how their portfolios look in the future. That was the challenge: how do we best cater to all these different needs?”
The need for control
Time horizons aside, investors in QIC’s debut infrastructure fund are getting a core strategy targeting a 10 percent to 12 percent return with a 5 percent yield attached. Or rather, an “active-core” strategy, as QIC terms it, since the manager makes a point of stressing it tinkers with the assets it invests in.
“Because we are an active-core investor, we want to preferably have a control stake or we want to be equal largest shareholder. That’s quite important so that we can add our overall asset management focus,” Papathanasiou explains.
That blind pool is, in many ways, an extension of QIC’s 11-year infrastructure investment journey, during which time it has committed more than A$7 billion through separately managed accounts on behalf of Queensland’s two defined-benefit and defined-contribution superannuation funds as well as high-profile clients such as Australia’s Future Fund and the California Public Employees’ Retirement System. Its A$9.7 billion portfolio was returning an annual net 15.7 percent to 30 June, 2017.
That SMA legacy also helps explain why, in an age of global mega-funds, QIC decided to cap its debut global vehicle at A$2.35 billion (its original target was A$1.75 billion).
“We have a single asset limit of 20 percent for the fund, but, in addition to that, we also have co-investment capital. Furthermore, we bring our SMAs to invest alongside the fund. So, we can do smaller deals if they don’t suit the SMAs, but we can also do very large transactions if we bring along our SMAs,” Papathanasiou says.
That’s not the only reason for the fund’s relatively modest size, though: “It was the first time we were out to market with that fund, so we were keen to ensure we could invest that amount comfortably, with no style drift,” she adds.
An example of the scalability and control positions QIC seeks can be found in last September’s A$9.7 billion deal for a 50-year lease of Port of Melbourne, Australia’s largest trade hub. As a leading member of the Lonsdale consortium, QIC was the largest co-shareholder (at 40 percent) alongside Global Infrastructure Partners as it clinched one of 2016’s biggest deals (the other consortium members were Future Fund and the Ontario Municipal Employees Retirement System).
“We’ve just hit our one-year anniversary,” Papathanasiou states, rattling off a list of key achievements that include the recruitment of a new chief executive – Brendan Bourke, who was formerly the chief executive of Queensland Motorways, a past QIC asset – and a chief financial officer; submitting the Port’s first regulatory compliance statement; putting in place a completely new risk-management framework; hiring an independent chair for the board; engaging with employees to ensure a smooth transition; and doing an ESG review of the Port, “which is an area that’s quite important for our clients from an asset-management focus,” Papathanasiou adds.
Walking the walk
ESG is a good example of QIC’s forward-looking nature. Of course, its level-headed embracing of ESG – partner Leisel Moorhead argued in a previous article that it can “materially improve risk management” and boost returns – is far from unique among managers these days. But combine it with QIC’s approach to technological change, macro-economics and diversity – areas in which it has conducted and published significant research – and you have a manager that is truly thinking about how the world is changing and how best to harness that change.
“We have pension funds, insurance companies, defined-benefit funds, so they all have different investment profiles. That was the challenge: how do we best cater to all these different needs?”
Take diversity. We met Papathanasiou a day before our debut Women in Infrastructure forum, when the world was in the midst of disgraced Hollywood mogul Harvey Weinstein’s sexual harassment scandal, which prompted a long-overdue discussion about workplace equality in the 21st century.
“What I find really interesting watching the Weinstein scandal and how that’s spread to certain governments is how the community and the press have been reacting to it. Across the board, the community is saying that our standards require gender diversity and to have broad cultural change you need more women at senior levels,” Papathanasiou argues.
To its credit, QIC is walking the walk on gender equality in what is a very male-dominated asset class. Not only is Papathanasiou a co-founder (“We have one of the highest proportion of women at senior level,” she says) but the manager’s workforce is 52 percent male and 48 percent female, with more women than men (55 versus 45 percent) joining it last year. That’s in addition to steps to ensure gender pay equality and a bespoke programme aimed at the development of women, among other measures.
“I think having women makes really good business sense. We are infrastructure investors and we serve communities that are half female. Also, in the current environment, with technology disruption and all that’s going on politically and economically – it’s a much more complex environment and you want to have diversity of views. We want an environment where people speak up and share their opinion and where those different opinions are respected and listened to.
“Also, when you’re hiring, why would you exclude half the pool of candidates by excluding women? Particularly now there’s a bigger demand for talent as more and more investors come into the market?”
With that in mind, how does she rate the asset class’s attractiveness to women? “I think infrastructure is the space to be in, and a very interesting space for women, particularly given its focus and growth, but for some reason that message isn’t getting across yet,” she answers.
Still, the asset class is a far cry from when Papathanasiou was at the start of her infrastructure career as an investment banker in the late 1980s. “At that time, it was a very male-dominated environment with little flexibility about how you worked – you just had to work hard – and it wasn’t a very family-friendly culture. And I already had two children,” she recalls.
Global or Australia-plus?
With QIC’s forward-looking credentials – not to mention its willingness to take the road less travelled – firmly established, it’s time to look at another of its distinctive characteristics: its ‘Australianness’.
If you are looking for access to Australian dealflow, QIC’s got you covered. With about A$600 million invested (and A$800 million committed) from its A$2.35 billion fund across Port of Melbourne, utility Lockhard Energy and the Powering Australian Renewables fund (in partnership with energy firm AGL), QIC’s flagship global infrastructure fund is, for the moment, very much an Australian story.
Taking a look at QIC’s activities outside the fund yields a more balanced portfolio, with four of its nine directly owned assets located in places such as Canada, the US and the UK.
Papathanasiou assures us the fund is also headed in that direction.
“Our strategy from a portfolio construction perspective has been 60 percent Australia and 40 percent offshore. Now that we have three assets in the fund, we’d like to have an offshore asset but we have to find relative value in other geographies,” she says.
That’s not just to make sure the fund conforms to its ‘global’ moniker, but also because it makes sense from a portfolio construction perspective.
“We do a lot of thinking around portfolio construction,” Papathanasiou says, “and we understand how each of these assets behave in different economic scenarios. We’re not necessarily saying we know what’s going to happen, but we’re thinking about it. So, we overlay these different scenarios with each of our portfolio reviews across all our assets and we build the cashflows for all those macro scenarios by asset and we then aggregate them to look at how our portfolios perform across a range of different situations.”
She continues: “That includes asking what kind of exposure we have if things happen differently and what types of assets we need to acquire to maybe balance out the portfolio? In that context, I would like some offshore exposure from a portfolio perspective and if you look at the three assets we have in the fund, I’d probably like additional GDP exposure.”
Still, like many of its peers, having a fund full of regulated and contracted assets is not a bad place to be if higher interest rates – with their expected positive impact on revenues – do, indeed, materialise. “Our view is that rates are likely to increase, but will plateau at lower-than-historic levels,” Papathanasiou offers.
Making a quick buck off an adjusted WACC, though, is not really the QIC ethos. As Papathanasiou puts it: “We are long-term owners of privileged assets, so you need to maintain your social licence to operate and be good stewards of those assets. That’s a different mindset.”