Most limited partners say they are looking for close alignment with their fund managers. They’re looking for strong returns and fair fees, yes – but also a manager that will help them achieve their goals over the medium or long term.
For most, that means being selective. Brisbane-based superannuation fund QSuper has taken that a step further, and only works with three infrastructure managers ,despite having an infrastructure portfolio valued at A$10.6 billion ($7.4 billion;
They are: QIC, its longest-running relationship; Alinda Capital Partners, which looks after QSuper’s stake in London’s Heathrow Airport; and Global Infrastructure Partners, with investments in that firm’s second and third global funds and a co-investment mandate.
Charles Woodhouse has been head of funds management at QSuper since May 2009 (bar a stint as deputy chief investment officer in 2015-16) and oversees all of the superfund’s external manager relationships. He will take over as chief investment officer in September this year, taking over from retiring incumbent Holzberger.
The fund chose not to have a head of infrastructure or a head of real estate when it decided to expand its exposure to real assets.
“Something we’ve tried very diligently to do is not create asset-class silos,” says Woodhouse. “All the relationships that we have are quite customised around the fund’s needs – whether it’s in infrastructure, real estate, or private equity. But no-one [at QSuper] works exclusively in one asset class. We like that generalist approach so that they don’t get protective over their portfolio.”
Woodhouse joined 10 years ago from QIC, where he was director of alpha investments, as QSuper looked to move away from the single-manager relationships it had in most asset classes.
It was this process that led the team to focus on a small number of external manager relationships.
“When we began to globalise our infrastructure, real estate and private equity programmes, we were coming from single-manager relationships,” says Woodhouse. “And as we added other managers, we realised we wanted to take more control over the portfolio construction.
“As we implemented mandates at that stage seven or eight years ago, we moved to what we call non-discretionary mandates, where we have a small number of very concentrated relationships – which are therefore very large relationships. The idea is we can see the assets that managers source, and really pick and choose the ones that best suit our overall portfolio and objectives.”
In 2010, the fund had around A$20 billion of assets under management, with a A$1 billion infrastructure portfolio representing an exposure of around 5 percent. As at 30 June, the fund’s AUM totalled A$112 billion – A$22 billion of which is managed by QIC – and exposure to the asset class has almost doubled in percentage terms to just under 10 percent. The portfolio’s value is now A$10.6 billion.
“We have a philosophical view that the opportunity set for adding material value through manager selection is just much greater in the unlisted asset classes”
Charles Woodhouse, QSuper
“The fund had always struggled with a single relationship [in infrastructure] to source enough assets to keep pace with the fund’s growth, and also drive the asset allocation up to the mid-point of our range of 5-15 percent,” Woodhouse says.
The fund owns stakes in 13 infrastructure assets and two closed-ended funds.
“We were really seeking assets that could provide some sort of inflation linkage in their cashflows as well as strong yields,” Woodhouse says. He adds that it is primarily a core portfolio with some higher return-seeking assets. The split is 57-43 in favour of core.
The fund viewed infrastructure as a “target-rich” asset class to find investments with inflation-linked cashflow exposure. Woodhouse says his team spends around 65-70 percent of its time working in real assets.
“We have a philosophical view that the opportunity set for adding material value through manager selection is just much greater in the unlisted asset classes.”
The first manager QSuper chose to add to the existing QIC relationship was Alinda. The tie-up is built around one asset: Heathrow Airport.
“Post-GFC, we had an opportunity to get invested in that asset and we have high conviction in Alinda’s ability to continue to [manage it well],” says Woodhouse. “We’ve had a longstanding and very productive relationship that’s really focused around that single asset.”
In contrast, the QIC relationship is a domestically focused multi-investment one.
“We were really trying to focus managers on the assets and the area we felt they had a real competitive advantage in. That of course evolves, but back then there was quite a bit of capability [within QIC] around these domestic Australian assets.
“We did own international assets with them, and those investments have performed well. But there is something to be said for being local, I think, with some of these markets and assets. You’ll recall a few years ago there were a number of assets that came to market, so we were active with them to participate in some of those transactions quite successfully.”
Those deals included investments in Brisbane Airport, the Port of Brisbane and the NorthConnex road tunnel in Sydney.
It was the privatisation of the Port of Brisbane that introduced QSuper to its third relationship: Global Infrastructure Partners. The Queensland government awarded the 99-year concession to a consortium of IFM Investors, GIP, QIC and the Abu Dhabi Investment Authority.
The consortium paid A$2.1 billion, with IFM, GIP and QIC taking 27 percent stakes, and ADIA taking 19 percent. GIP sold its stake to Canadian pension Caisse de dépôt et placement du Québec in 2013 for A$1.4 billion. QSuper’s 19.7 percent stake is managed by QIC; the balance is held by QIC for other clients and its Global Infrastructure Fund.
“What we saw with GIP on Port of Brisbane was the real value of what I would call a vertically integrated investment manager. You could see they had individuals in the team who had deep operational experience in the specific asset classes where they work. We weren’t invested with them in those assets [at that time], but we could certainly see the value drivers that they were using to really try and make those assets as efficient and productive as they could be.”
But QSuper didn’t want to invest in the firm’s closed-ended funds, so it had to find a different way to structure its relationship with GIP. “Their closed-ended funds have been great investments. But we were able to basically build out a programme there where we could operate as a very material co-investor alongside that fund – and by very material, I mean cheque sizes on the order of what a consortium partner would normally write.”
This, Woodhouse says, allowed GIP to speak for the entire equity share of an asset more often: “When you’ve got one shareholder, instead of several, who is able to help management go in and execute against a business plan, I think that ability to move more nimbly and reactively as needed was something that was very attractive to them, and continues to be very attractive to them.”
The first deal they worked on was the privatisation of NSW Ports, where GIP manages QSuper’s 15 percent stake in the asset. Woodhouse believes this is one of the fund manager’s first separately managed account deals.
QSuper does have “material commitments” to GIP’s second and third funds, Woodhouse says. But these make up a “relatively modest” part of its infrastructure portfolio, more than 90 percent of which is held under separately managed accounts. GIP is also the only relationship open to new investments.
With GIP getting to the stage where it may exit some Fund II and III assets where QSuper is co-invested, the fund will have to make a decision about whether to exit at the same time. “We have not been very active sellers of infrastructure assets for two reasons: the investments that have been made on our behalf have been good investments on the whole; and the investments that we hold are much more difficult to replace relative to something like a real estate asset,” he says. However, he adds that the fund is growing strongly and still has an “active appetite” to acquire assets.
But does that expansion mean a fourth manager might be added? “We’re always open to that. I suppose the challenge that we have is that we haven’t found very many managers of high quality that have really looked to build the kinds of strategic relationships that I’ve described.
“There’s a lot of money that’s looking to flow into this asset class. Oftentimes what I see is managers managing to their own business plan, and then clients needing to adapt to an investment programme that supports that business plan. Where you see us having relationships is where you’ve seen efforts from the investment manager to find a way to really align their success with our members’ success, in terms of return outcomes. We just have struggled a bit to find a greater number of managers that will actually take that step.”
And what about in-house? The only superfund bigger than QSuper, the A$145 billion AustralianSuper, has gone all-in on this strategy. Many of the fund’s peers, such as the A$75 billion First State Super, have also built internal teams.
Woodhouse chuckles. “We’ve thought very long and hard about that. The easy way to look at it is to say: ‘We could save fees’. But the question is: ‘Would you get the same high-quality management?’
“Could QSuper, realistically, [build] a team of equivalent capability of a QIC or a GIP? I think that’s a big ask and I don’t see very many internal teams that would compete at that level.”
The other issue is cultural differences between private funds management and superannuation. “Their work practices are quite different. They work long hours and extended periods of time on these individual assets when you’re doing a bid or a sale. That doesn’t mean we don’t work long hours – we do – but it’s a different way in which they work. And there’s different remuneration and different travel that they do, and things like that. It’ll be interesting to see how that plays out in some of these pension funds over time, because I think that will be a significant challenge.”
For now, though, the message seems to be that QSuper’s strategy is working in terms of generating the returns it wants, with much of that put down to the fund’s 30 percent allocation to real assets, plus a 25 percent allocation to bonds. Woodhouse does not comment on returns, other than to say “that returns have met or exceeded expectations across all mandates”.
Within real assets, infrastructure will remain a key plank: “We continue to think the asset class has the potential to generate solid, attractive returns. Hence our allocations are at the higher end of our ranges.
“We are not shying away from investment in this particular asset class and we continue to see assets that look potentially interesting to us.”
‘Stick to your knitting’
QSuper’s infra portfolio is weighted towards core assets. But Woodhouse has noticed fund managers coming to him with assets that might not usually be classed as infrastructure.
“I have been pitched opportunities for data centres by infrastructure managers, real estate managers and private equity managers – all three asset classes coming with the same kind of asset,” he says.
“There’s definitely a broadening going on and I wonder if that isn’t a weight of capital thing.
“Clients will sign up with a three- or five-year investment period, say, into an infrastructure fund. If they don’t invest the money, they don’t get to keep the money, and [maybe] that’s putting pressure on some of these firms to think more broadly as houses that have specialised private-equity skillsets, as opposed to infrastructure managers.
“That’s a concern for us. We are very happy to invest with our partners in assets and in industries where they have demonstrated very strong experience in that kind of an asset and in that geography.”
Woodhouse notes, though, that its existing managers don’t pitch these kinds of opportunities to the fund: “They understand us very, very deeply, so they know what we’re interested in and they really stick to their knitting in terms of trying to find opportunities that will meet with us.”