If experience has taught Julio Garcia, IFM Investors’ North American infrastructure head, one thing, it’s that patience – and timing – are key to infrastructure investing.
Take the Indiana Toll Road, arguably IFM’s flagship US investment. Having entered the market in 2006, IFM had three US energy assets under its belt and had been searching, since 2013, for a transportation asset that was strongly linked to GDP growth. The problem was that nothing too attractive was presenting itself on the nascent US market.
Enter the bankrupt Indiana Toll Road, sold in its entirety in 2015 by a Macquarie-led consortium for $3.4 billion.
What started as Indiana’s dive into infrastructure privatisation had ended in disaster. The $3.8 billion deal the Macquarie consortium entered into in 2006 for a 75-year concession of one of the Midwest’s most important highways went bust after traffic across the 157-mile road fell because of the recession and short-term debt used for the acquisition ballooned out of control.
IFM was there to pick up the pieces, and while Garcia readily admits that “bankruptcy and reliable infrastructure don’t [usually] go together”, the team got comfortable with the fundamentals of the deal.
“Every year from when it was put into the long-term lease in 2006 until it went into bankruptcy, revenue grew, earnings grew and earnings margin grew,” Garcia says. “The problem with the ITR is that it had the wrong capital structure.”
The deal allowed IFM to get majority control of the kind of essential infrastructure asset that turned it into a “household name” in Australia. “The investments we make impact millions of people. They’re critical to the economies in which they operate,” Garcia says.
“The problem with the ITR is that it had the wrong capital structure.” – Julio Garcia, head of North American infrastructure
We come from a land down under
IFM was created in Melbourne more than two decades ago. Its organisation is the result of Australian superannuation funds grouping together to invest in large-scale market opportunities. At the same time, the Australian government began its pioneering role in the privatisation of infrastructure, kick-starting what would eventually turn into a multi-billion-dollar global industry.
Both of these conditions shaped what IFM would become. The firm has $71 billion of funds under management, including listed equities, private capital and debt. But its infrastructure portfolio – accounting for nearly half its funds under management at $30 billion – is what has built IFM’s reputation in Australia, Garcia says. Toll roads and ports, five of the country’s largest airports and a wastewater facility are fully or partially owned by IFM. It has a reputation as a trusted asset manager overseas as well – built off big investments such as Manchester Airports Group and the M6 Toll Road in the UK.
In the US, IFM has acquired stakes in midstream, transportation and utility assets. But it wants more – evident in the shift of capital over the years. Since 2013, Garcia says, IFM has invested around $12 billion in infrastructure, and now has nearly $7 billion invested in the US.
The global financial crisis played a large role in creating investor appetite for infrastructure. IFM saw that appetite in the US and moved in.
The manager had just got a foot in the door of the US market when the crisis hit, investing $250 million from 2006 to 2007 in power utility Duquesne Light. Suddenly, LP calculations changed. Instead of high growth, they sought investments that could match their long-term liabilities, such as pension benefits. Infrastructure started gaining traction as a safe investment, an asset class that could provide bedrock, steady returns.
“What we see with many pension funds is that, because they have a very long-term nature in the liabilities they’re trying to match in providing retirement benefits for their members, infrastructure is attractive as the assets can provide long-term cashflows to offset those liabilities,” Garcia explains. “They don’t need 30 percent growth every year, but they want growth to be predictable.”
IFM began expanding its portfolio through one of two open-ended funds. Created in 2004, the Global Infrastructure Fund, currently returning about 10 percent net, focuses on opportunities outside of Australia to complement its older sister vehicle, the Australian Infrastructure Fund, launched in 1995. Their long-duration strategy allows IFM to hold and improve infrastructure assets and fits with pensions’ need for steady returns. The firm has now invested about $8 billion in Australia and $15 billion outside of it.
“The way we manage assets is to have a portfolio that is constructed to be resilient over a number of different economic scenarios,” Garcia states. “Some of the concessions we’ve gone into are 75 years, some are 99 years. While none of us will individually be here for that period of time, we see ourselves as a custodian of the investment during that period.”
The strategy seems to be selling in the US. IFM now counts more LPs in its funds from the North American market than from Australia – 55 percent (the majority in the US) and 25 percent respectively. “Coming over to the US expanded the investment opportunities for IFM’s existing investors, but it also meant that we were able to add a whole group of new investors,” he says.
But with a fund that has no end date, how do you judge performance? “We’re seeing a lot of re-ups from our investors that continue to support IFM and make new commitments to IFM. I believe that speaks louder than any comment we might make,” Garcia answers.
Size equals resiliency
IFM’s decision to focus on large-scale assets is not just born out of a desire to write big cheques – it’s also about resiliency.
“Our experience has been that you have a lot more resiliency in larger assets because they’re much more critical to the economies they operate in,” Garcia states, in a reference to IFM’s focus on infrastructure.
However, in the US, except for a few sectors such as energy, the bigger the asset, the more control government is likely to have. So, for a while, IFM’s US portfolio was all energy-related.
Following the Duquesne Light deal, in 2007 IFM bought a 15.8 percent stake in the country’s largest gasoline transportation pipeline. A $426 million investment in Colonial Pipeline gave it access to an asset connecting refineries in Houston to gas stations, airports and military installations along the East Coast up to New York.
IFM’s next US deal would have to wait until 2013, when it agreed to invest $2.4 billion in Freeport LNG, a natural gas liquefaction facility in Texas. By then, the firm had three energy investments in its US portfolio, and, as mentioned, wanted a transportation asset.
When it puchased the Indiana Toll Road, IFM got its wish and something equally important – its name on the US map. Garcia says 70 US pensions became beneficiaries of the investment. “That’s something we wouldn’t have been able to say a couple years ago. I don’t even think there would have been 70 funds in the US that were interested in infrastructure,” he adds.
As a show of confidence, and in keeping with his “custodian of the investment” philosophy, Garcia points out IFM has invested $260 million to improve the toll road since the 2015 deal. “We feel that those types of assets should be able to provide returns for a long period of time, if properly maintained and proper investment continues to go into them.”
He is so convinced that privatising the Indiana Toll Road was the right move, plagued only by timing and a bad deal structure, that he does not hesitate to commend then-Governor Mitch Daniel for taking the political risk. “The best example of asset recycling we’ve seen here in the US is the Indiana Toll Road,” he states.
Politics: how much is too much?
Garcia is likely aware there will need to be more privatisations like in Indiana to meaningfully continue IFM’s US growth. But he is equally cognisant that, while marquee initiatives often need political champions like Daniel, there is a fine line between political support and politicisation.
“One thing I think is very important about infrastructure is it doesn’t become overly politicised,” Garcia warns. He adds it was good to see infrastructure playing such a high-profile role in last year’s presidential election and hopes the consensus among legislators to pass infrastructure laws remains.
After seven years working for IFM in Australia, coming back to lead the New York office in 2014 has allowed Garcia to combine what he learned from Australia’s infrastructure market with what IFM hopes to achieve in the US.
For example, there are growing signs the US government is serious about creating the conditions for large-scale private infrastructure investment. Known details about what legislation President Donald Trump’s administration may push for includes $200 billion of federal funding for infrastructure spending over 10 years, matched with $800 billion from private investors.
Australian companies, including IFM, as well as Joe Hockey, Australia’s ambassador to the US, have lobbied the administration to implement a US version of Australia’s ‘asset recycling’ initiative (see US Report 2017, p. 22).
“Asset recycling provides government with another tool in terms of being able to improve infrastructure,” Garcia explains. “There’s a lot of virtues to asset recycling. Is there political will? There’s certainly a lot of talk about it right now.” One sector Garcia believes is ripe for private investments is airports. The handful of US projects that have been procured as public-private partnerships – including La Guardia, Denver International and Kansas City International – are a “good start”, he contends, but IFM’s strategy is to closely manage the assets it owns. So far, US airports have not given up that kind of control, Garcia says.
“What’s less attractive is investing in only one part of the airport because you don’t have the ability to master plan,” Garcia explains. “The ability to master plan an entire airport and look at its needs over the very long term, not simply through the length of a political cycle, allows you to provide a much better facility.”
So how bullish is he about the US opportunity these days?
“The market opportunity here is tremendous, but people have said that the market opportunity is tremendous for a long period of time,” Garcia concludes. “So, it’s really about when that can become a reality. It’s something that is moving along now and we want to be a bigger participant in it.”