As Shakespeare famously wrote: “What’s in a name?” In the case of ‘super-core’, the answer is a whole lot.
Even before it raised a cent – and as we wrote earlier this week, it’s on the verge of raising an initial €2.5 billion – Macquarie’s Super Core Infrastructure Fund was already a triumph of marketing. We don’t mean this in a backhanded, style-over-substance kind of way, but rather that Macquarie managed to alight on a name that quickly and effectively encapsulates several things.
Firstly, at a time when lines are blurring across the industry, that this is a fund with a laser-focus on core infrastructure. Not born-again core or de-risked core-plus, but the ‘corest’ of the core: regulated assets. Secondly, that by focusing on these assets, this is a fund about yield and not returns. And thirdly, and by dint of its focus, that this is a vehicle with a lower fee structure.
If imitation is the sincerest form of flattery, Macquarie can afford a modest blush because Brookfield, one of the biggest names in the industry, saw enough potential in the super-core moniker to start raising its own, open-ended Brookfield Super-Core Infrastructure Partners before Macquarie’s vehicle hit an official close – though it’s worth noting both these funds have ancestors in real estate.
More importantly, super-core funds catch the zeitgeist by acknowledging we are entering a macroeconomic cycle that favours core infrastructure and by responding to investor demand for these assets (not to mention long-duration structures and lower fees).
The two are, of course, related, and just this week we covered a report estimating that a further $130 billion will be allocated to infrastructure by global institutional investors over the next two years. The main reason? Investors still can’t get no satisfaction from traditional fixed-income products, cementing the ongoing migration to real assets. And when you’re migrating from fixed income, low-risk yield is very much front of mind.
Of course, super-core funds raise important questions about availability of assets and regulatory risk that interested parties shouldn’t ignore. The latter is arguably at an all-time high across the OECD – most investors’ preferred destination – thanks to falling living standards and populist pressure on politicians to defend consumer interests. Increased competition has also led to a well-known return compression for these assets.
Both come across clearly in Macquarie’s marketing materials for its super-core fund, which uses its decade-long investment in Thames Water as an example of what regulated assets can deliver and, perhaps unintentionally, also manages to highlight what they no longer can’t.
Case in point: the cost of debt outperformance that is the single-largest component of the 2.7 times total return Macquarie generated from Thames Water, and which will become much harder (if not outright impossible) to achieve after the “profound changes” watchdog Ofwat is proposing for the UK water sector.
Macquarie’s overall track record with regulated utilities also illustrates how much impact competition has had on the sector. Over the years, Macquarie has generated a combined gross 12.4 percent IRR from its European regulated utility investments. While a like-for-like comparison is difficult due to the different fees attached to the funds holding those assets, it’s a safe bet a net value would still be higher than the 7-8 percent net return its super-core fund, which focuses primarily on Europe, is promising. Yield also looks set to take a hit, with the super-core fund aiming for 5 percent annually versus the 6.5 percent generated by Macquarie’s historical investments.
Still, it’s important to keep some perspective on competition. As Blackstone is telling potential LPs for its new $40 billion infrastructure fund, the asset class had a similar dealflow to private equity in 2016 ($329 billion versus $339 billion) but only around one-quarter of the dry powder ($137 billion versus $535 billion).
Also, by structuring their super-core funds as long-life or open-ended structures, both Macquarie and Brookfield gain greater control of when to buy and, crucially, when to sell these assets, helping to avoid overheated market peaks or having to divest at the height of regulatory disruption.
Expect to see this catchy moniker crop up more and more.