Mark Mudie - HRL Morrison & Co - Super fund investment in infrastructure – the opportunities and challenges

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Mark Mudie delivered the presentation at the 2014 Future of Infrastructure Conference.

The Future of Infrastructure forum explored state and national challenges which impact the long term economic growth and future of infrastructure development in Australia at this time. It also addressed the latest proposals for changes within Australia's infrastructure.

For more information about the event, please visit: http://bit.ly/FutureofInfrastructure2014

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Mark Mudie - HRL Morrison & Co - Super fund investment in infrastructure – the opportunities and challenges

  1. 1. Super fund investment in infrastructure the opportunities and challenges Mark Mudie, H.R.L. Morrison & Co mark.mudie@hrlmorrison.com Super fund investment in infrastructure – challenges
  2. 2. Morrison & Co 20 years of infrastructure investment experience Morrison & Co • Founded in 1988 a specialist Infrastructure Investment Manager and Operator Proven investment team • Over 40 investment professionals across offices in - Overall team of 60 Institutional platform • A$6 billion consolidated AUM • Founded Infratil in 1994, listed on NZX (IFT.NZ) & ASX (IFZ.AU) • Individually managed accounts with a select group of large institutional clients (includes Australian and New Zealand sovereign investment entities) Individually managed accounts with a select group of large institutional clients (includes Australian and New Zealand sovereign investment entities) - Bespoke client investment strategies - Customised relationship model - Co-investment opportunities across client “club” • Mandates cover global listed and private markets infrastructure investment management Outstanding performer • 17% after tax return over 20 years Experienced owner operator • Senior management from operational backgrounds that are more complex in nature but provide better investment prospects over the medium to long term Long term perspective • Track record of owning/managing infrastructure assets over a long period with many assets held for more than 10 years Morrison & Co introduction of infrastructure investment experience a specialist Infrastructure Investment Manager and Operator across offices in Australia, New Zealand and Hong Kong, in 1994, listed on NZX (IFT.NZ) & ASX (IFZ.AU) Individually managed accounts with a select group of large institutional clients (includes mandates with the key Australian and New Zealand sovereign investment entities) 2 Individually managed accounts with a select group of large institutional clients (includes mandates with the key Australian and New Zealand sovereign investment entities) strategies investment opportunities across client “club” global listed and private markets infrastructure investment, along with infrastructure asset operational backgrounds with proven industry capability enabling investment in assets that are more complex in nature but provide better investment prospects over the medium to long term Track record of owning/managing infrastructure assets over a long period with many assets held for more than 10
  3. 3. 1. Current investment climate 2. The $200bn opportunity 3. Investment considerations Agenda 3
  4. 4. We are reaching the final stage of a 30 year interest rate super cycle Modern infrastructure investors have only operated in a world of falling interest rates 10% 12% 14% 16% 18% 10yr Nominal Bond Yield 10yr Real Bond Yield (Actual) Margaret Thatcher becomes PM Real and Nominal US 10yr Government Bond Yields: 1953 to 2013 Source: US Federal Reserve, Bloomberg (4%) (2%) -% 2% 4% 6% 8% 10% 1953 1958 1963 1968 1973 1978 Assoc. British Ports BAA We are reaching the final stage of a 30 year interest rate Modern infrastructure investors have only operated in a world of falling interest rates 2nd Listed Infra Fund: Infratil Black Monday Crash Fed Chair Greenspan appointed 4 1983 1988 1993 1998 2003 2008 2013 9/11 Lehman Bros. Collapse Sydney Airport Port Botany / Kembla Ports of Auckland National Grid (UK) Contact Energy Perth Airport BAA Loy Yang PS Port of Brisbane
  5. 5. 1. Large pension funds and SWFs continue to grow • Australian super funds have grown at 15.5% pa since 2000 - Total estimated assets of $1.84 trillion at 31 March 2014(1) - Total contributions for the year ending March 2014 were $93.5 billion (~$8bn pcm) • Growth and diversification of Asian SWFs into alternatives & Chinese SOEs - Japan (GPIF) - $1.2trillion - Malaysia (EPF) - $300bn The amount of capital targeting assets is increasing Pension & SWF fund assets are growing, and their infrastructure allocations increasing - Malaysia (EPF) - $300bn • “Strategic” objectives of Chinese SOEs 2. Allocations to infrastructure are increasing • 72% of active investors in infrastructure still have less than 5% of total assets allocated to infrastructure • Target allocations range from 5-10% • Allocations are 10-15% amongst established infra investors in Australia & Canada - Australian Super is at 14% (2) 3. Need to run to stand still is compounded by buoyant equity markets 1. ASFA, March 2014 Quarterly Superannuation Performance publication 2. Asset allocation factsheet, Australian Super website 38% The amount of capital targeting assets is increasing Pension & SWF fund assets are growing, and their infrastructure allocations increasing Market $bn (2000) $bn (2012) CAGR USA 10,141 16,851 4.3% Japan 2,418 3,721 3.7% UK 1,256 2,736 6.7% Australia 275 1,555 15.5% Canada 668 1,483 6.9% Netherlands 441 1,199 8.7% Total 15,199 27,545 5.1% Largest Pension Fund Markets 5 Total 15,199 27,545 5.1% 46%
  6. 6. Plentiful availability of capital – both equity and debt “a $40bn+ week in infrastructure” The result… New benchmarks continually being set in private market transactions 22nd April - QML Portfolio of Qld toll roads 4 x committed financing bids submitted $7.1bn winning purchase price 28th April - East-West Link Greenfield PPP with substantial construction risk 3 x committed financing bids submitted $6bn capex (according to Wikipedia…) 30th April – Port of Newcastle Long term lease for a landlord port business 27x EBITDA multiple $1.75bn winning purchase price “Full” market valuations 3x increase in the value of Port of Brisbane in 3 years continually being set in private market transactions Driven by a combination of: • Improved business conditions (ie EBITDA growth) • Reduction in equity discount rates • Willingness of equity to fully value future growth prospects 6 2.10 6.50 2010 2011 2012 2013 Acquisition price
  7. 7. 1. Current investment climate 2. The $200bn opportunity 3. Investment considerations Agenda 3. Investment considerations 7
  8. 8. Australia’s pipeline is the envy (and focus) of the world • 30+ State and Federal government assets earmarked for potential sale • If all come to market, likely to draw in excess of $100bn of capital - Power sector accounts for $70bn (driven by NSW and • Driven by Federal Govt incentives = 15% of purchase price - Capped at $5bn (meaning the first $33bn of asset sales/infra projects will be eligible) - States have until June 2016 to agree the specific assets to be sold and the specific infra projects to be brought forward and invested in $100bn of State and Federal government assets PPPs • ANZ estimates PPP projects worth around $50bn will commence by • These projects will be dominated by transport • Having a profound impact on the structure of the Australian contracting market • Following an enormous infrastructure build in Australia, we expect major energy companies will soon look to monetise the capital from these projects by divesting some non • Live example: BG’s disposal of >$2bn capex LNG $50bn of greenfield $50bn of LNG/ resource disposals Australia’s pipeline is the envy (and focus) of the world 30+ State and Federal government assets earmarked for potential sale If all come to market, likely to draw in excess of $100bn of capital Power sector accounts for $70bn (driven by NSW and Qld) incentives = 15% of purchase price Capped at $5bn (meaning the first $33bn of asset sales/infra projects will be eligible) States have until June 2016 to agree the specific assets to be sold and the specific infra projects to be brought 8 ANZ estimates PPP projects worth around $50bn will commence by 2020 projects will be dominated by transport-related infrastructure in Australia’s larger urban areas Having a profound impact on the structure of the Australian contracting market Following an enormous infrastructure build in Australia, we expect major energy companies will soon look to monetise the capital from these projects by divesting some non-core assets >$2bn capex LNG pipeline
  9. 9. 1. Current investment climate 2. The $200bn opportunity 3. Investment considerations Agenda 9
  10. 10. • Empirically, regulated energy and water utility stocks have demonstrated a stronger positive correlation with bonds since the on-set of QE • Capital structures of these entities tend to be highly geared, increasing the adverse impact of rising interest rates - The building block approach to maximum allowable revenues limits should provide a release valve at regulatory re-set points • Generally subject to greater regulatory risk as governments respond to cost The impact of rising interest rates & additional capital will not be uniform across infrastructure sub Bond-like infrastructure & utilities • Fundamental value creation, rather than bond yields, will drive investor returns in these sub • Continuing improvement in economic growth will have a positive impact on these greater volumetric exposure • However highly geared will be susceptible to rising interest Growth infrastructure assets • High barriers of entry to the primary market given the necessity of: - Industry relationships - Sector specific commercial, legal and financing skills - Long bid & execution phases (12-18 months) - Variable cheque sizes - Bid costs Greenfield Empirically, regulated energy and water utility stocks have demonstrated a stronger positive correlation with bonds Capital structures of these entities tend to be highly geared, increasing the adverse impact of rising interest rates The building block approach to maximum allowable revenues limits should provide a release valve at regulatory Generally subject to greater regulatory risk as governments respond to cost-of-living concerns The impact of rising interest rates & additional capital will not be uniform across infrastructure sub-sectors Fundamental value creation, rather than bond yields, will drive investor returns in these sub-sectors Continuing improvement in economic growth will have a positive impact on these infrastructure sub-sectors given their susceptible to rising interest rates (as per many pre-GFC transactions) 10 High barriers of entry to the primary market given the necessity of: Sector specific commercial, legal and financing skills 18 months)
  11. 11. Disciplined approach to origination, execution & management is critical to achieving objectives Targeted origination activity 1 • Sub-sectors / geographies of focus • Selective participation in processes • Development of preferred access points - Strategic JVs with industrial partners - Investment in development platforms • Listed vs private markets • Key differentiator in sales processes - Success requires deep analysis of individual companies’ long term growth drivers, operational improvement opportunities, pricing power and ability to generate ancillary revenues • Fundamental to investment returns - Active management will be a key differentiator of performance • Consortium formation / co-investors • Investment managers • Transaction advisers Operational expertise2 Alignment of interest3 Disciplined approach to origination, execution & management is critical to achieving objectives Strategic JVs with industrial partners Investment in development platforms deep analysis of individual companies’ long term growth drivers, operational improvement opportunities, pricing power and ability to generate ancillary revenues be a key differentiator of performance 11

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