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Richard Hoskins - Hastings - Attracting and partnering with offshore infrastructure investment capital and creating national momentum for state reform across Australia
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Richard Hoskins - Hastings - Attracting and partnering with offshore infrastructure investment capital and creating national momentum for state reform across Australia

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Richard Hoskins delivered the presentation at the 2014 Future of Infrastructure Conference. …

Richard Hoskins 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

Published in: Business

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  • 1. www.hastingsinfra.com Attracting and partnering with offshore infrastructure investment capital Richard Hoskins, Executive Director Hastings August 2014
  • 2. 1. About Hastings 2. Capital supply 3. Views of foreign investors 4. Partnering issues 5. Conclusion Contents 2
  • 3. Section 1 About Hastings 3
  • 4. Pioneering Infrastructure Specialist 4 • Investment approach designed to achieve stable returns for investors • Hasting infrastructure equity track record1,5  Pre fees: 14.06% IRR and multiple of 2.09x  Net of fees: 12.5% IRR and multiple of 1.96x • A$9.2 billion in funds under management1,2 • A$6.9 billion of capital employed and made more than 40 equity investments since inception1,3 • Currently holds interests in 17 portfolio companies, collectively managing 30 assets • A$7.4 billion in distributions paid to investors since inception1,4 Note 1: All information to 30 June 2014. Note 2: Funds under management includes committed but undrawn capital. Note 3: Capital employed includes capital calls, initial public offerings, share purchase plans, institutional placements and the reinvestment of distributions. Amounts include balances invested for separately managed accounts. Number of investments does not include follow-on investments in the same asset. Strong alignment • More than 2/3 of the Investment Team own equity in Hastings under Long Term Incentive Plan • Enhances retention of senior management and the investment team • 20 years’ of experience • Launched one of Australia’s first infrastructure funds in 1994 • 101 employees located in 6 offices around the world • More than 70 institutional investors • Network of industry relationships derived from a long history of infrastructure investing Note 4: Distributions paid is for all funds and mandates, includes income and capital distributions paid or reinvested, returns of capital and investor redemptions. Past performance is no guarantee of future performance. Actual results may vary. Source: Hastings, 2014. Note 5: Multiple Total is value / Total investment (including tax credits, post fees). IRR is partly based upon unrealised investments.
  • 5. Section 2 Capital supply 5
  • 6. Capital supply to infrastructure globally • Unlisted infrastructure funds reaching final close in 2013 raised US$39bn across 49 funds: – This is close to the amounts raised in 2007 and 20081 • Pension plan investors are forecasting material increase in allocations (39%) and only small decreases (9%)1 • Canadian pension plans continue to be strong outbound investors: – Large direct investing teams with long track record investing in the sector • US pension plans are increasing their allocations to infrastructure off a relatively low base • European plans are also increasing their allocations: – Strong European focus – BUT larger pension plans and insurers are actively considering global opportunities Note 1: Source Preqin 6
  • 7. Capital supply to infrastructure globally (cont.) • Increasing outbound investment from Asia: – State Grid Corporation of China - acquired stakes in ElectraNet and SP Ausnet – China Merchants Group - acquired 50% of Newcastle Port – Samsung Life, KTCU and others – Victorian Desalination Plant • Increasing trend towards direct investing and co-investments: – Sovereign wealth funds – Large pension plans • Recent regulatory changes overseas have allowed new markets to invest in infrastructure and further increased capital flows • Broader acceptance of alternative investments: – Government Pension Investment Fund (Japan) (US$1.1 trillion in assets) initial allocation has stimulated Japanese demand Note 1: Preqin 7
  • 8. Drivers of allocations • Greater acceptance of infrastructure as an asset class – now a distinct and important asset class • Recognition for many defined benefit plans and retirement income products that their investment objectives should be more closely linked to liability matching • In a low interest rate environment, infrastructure is seen as a proxy for fixed interest but with higher returns without increased risks • Assets are becoming more readily available and accessible due to: – Governments and private companies de-leveraging their balance sheets – Growing requirements for private capital to fund the infrastructure deficit – Closed-end funds exiting investments as they approach their end point – Changed regulations and market conditions are encouraging divestments • BUT there are emerging negative perceptions around: – Amount of liquidity flowing into the sector – Prices paid in recent transactions globally 8
  • 9. Section 3 Views of foreign investors 9
  • 10. Infrastructure as an Asset Class 10 Significant Upfront Investment in Fixed Assets •Substantial capital investment is required to construct the physical components of infrastructure assets. Long Asset Lives •Generally durable with a long useful life before requiring replacement or significant refurbishment. Embedded growth opportunities •Often constructed with significant physical capacity to allow for growth in demand and, in many cases, the cost of capacity expansion can be a fraction of the additional construction cost. Strategic Competitive Advantage •Often monopolistic or oligopolistic in character due to high barriers to entry as a result of high construction costs, land scarcity, environmental considerations, government regulations and other restrictions. Regulatory Oversight •As essential services with significant market power, both publicly and privately owned infrastructure assets are often subject to some form of regulatory control. Relatively Inelastic Demand •The services provided are generally considered to be ‘essential services’ and, as a consequence, have limited or no alternatives. •Demand for these products or services is relatively stable, often grows with underlying economic growth and is relatively indifferent to pricing change. Infrastructure assets are expected to display the following attractive characteristics
  • 11. Perceptions of Australia by foreign investors • Australia is a highly desirable investment destination: – AAA rated soveriegn – Relatively high interest rates – Stable government with strong rule of law – Liquid currency • Australia is viewed as a proxy exposure to China and Asia: – Growth potential without the country risk • Geographic separation of large population centres translates into quality infrastructure investment opportunities: – Strong geographic monopolies – Low substitution risk • Opportunities largely arise from auction process rather than bilateral negotiations: – Often highly competitive (although it only takes two bidders to be competitive) – Relatively expensive to bid – Often require multiple equity participants and significant debt capacity to finance purchase price 11
  • 12. General attitude of foreign investors • Building and protecting their reputation as responsible investors is important. Typically: – Keen to engage with governments to present their credentials – Want to be seen as long term investors with capacity and appetite to fund growth opportunities • Investing in Australia is a relative proposition for foreign investors: – No “home country” bias forcing them to invest in Australia – Material opportunity cost to work in Australia due to distance and time zones – Foreign investors will objectively assess risk adjusted returns compared to opportunities in other markets – Level of competition for opportunities and expectations about market prices are very relevant • Need well structured and appropriately priced transactions, efficiently executed by sellers 12
  • 13. Section 4 Partnering issues 13
  • 14. Role of local investors • Local partners are seen as an important risk control: – All politics is local – local partners bring networks and relationships – Market experience – local partners have deeper understanding of market conditions and other factors that influence investment performance – Access to finance – local partners tend to have stronger relationships with domestic banks who are generally important sources of funding for opportunities • This limits the number of credible bidders for transactions as there are few local partners with capability to lead complex bids 14
  • 15. Governance Three approaches: 1. Passive institutional investor – bring scale and competitive cost of equity 2. Active financial sponsor – bring global investment insight, financing relationships (eg, export credit agencies), deep resources and comfort of a robust investment process 3. Strategic investor – bring operating and capital projects expertise Common threads: • Choosing their partner is important: – Generally seeking long term relationships – Identity of their partner and their investment approach is vital • Often seek change of ownership and transfer protections • Right to appoint directors and control decisions: – Some expect to be equal largest investor – Most want board seat entitlement as a minimum – Many expect negative controls over key decisions – Strategic investors often want simple majority control to put investment on balance sheet • Prefer to build sticky relationships rather than re-invent relationships for each transaction 15
  • 16. Foreign currency and tax • Translating Australian dollar returns into a foreign currency is a key leakage of value: – Australia is a high interest rate currency – Leakage can be the biggest impediment to investing in Australia • Foreign investors take different approaches to pricing this leakage: – Some hedge back each investment and factor resultant leakage into investment analysis – Others use an overlay at their portfolio level and consider adequacy of returns only on a local currency basis • Another key leakage of value is tax: – Recent changes to thin capitalisation has disadvantaged foreign investors relative to local investors – Many foreign investors cannot value franking credits 16
  • 17. Consortium formation 17  Board composition  Requirements for simple majority control  Reserved matters  Conflicts of interest Governance  Level of sector experience  Amount of knowledge of the asset being sold  Experience investing in Australia  Experience in similar bidding process  Existing or new relationship Experience Important considerations in forming a consortium with an offshore partner  Investment horizon  Approach to leverage  Distribution policy  Capacity to fund growth opportunities  Passive or active approach Asset management  Team resources applied to the opportunity  Team capabilities and experience  Location of key decision makers  Internal approval process  Level of potential value-add Resources  Return expectations  Investment philosophy  Impact of translating foreign currency and tax on their return expectations  Structuring requirements  Approach to bid costs Investment mandate
  • 18. 18 Section 5 Conclusion
  • 19. Conclusion • No shortage of capital for appropriate opportunities: – Trend is towards increasing allocations into infrastructure globally • Strong domestic pipeline of opportunities • Australia is a highly desirable investment destination: – BUT cannot afford to be complacent • Consortium formation requires careful analysis: – Local partners are valued by offshore investors – Governance, FX and tax are important issues to resolve upfront Executive Director Richard Hoskins Richard has been with Hastings for over seven years and has over 20 years of relevant industry experience. Richard leads Hastings Global Asset Management Team and focuses on the delivery of investment outcomes for each investment through targeted asset management and specialist input. Richard is Chair of the Equity Investment Committee and represents Hastings as a Director of many of Hastings’ portfolio investments, including Perth Airport, State Highway 130 5&6, Southwest Generation and Bonnyrigg Partnerships. Previously while at Hastings, Richard led or co-led UTA, Hastings’ largest fund, from 2006 to 2013. Recent investment transactions in which Richard has been actively involved include the acquisition of Phoenix Natural Gas, Sydney Desalination Plant, Freeport LNG and Southwest Generation and additional stakes in Melbourne Airport and Perth Airport. richard.hoskins@hastingsinfra.com +61 3 8650 3637 19
  • 20. Important Information and Disclaimer 20 Australia This presentation has been prepared by Hastings Funds Management Limited (ABN 27 058 693 388) (‘Hastings’), holder of Australian Financial Services Licence number 238309. Hastings is a subsidiary of Westpac Banking Corporation (’Westpac’). The information contained in this presentation is highly confidential and is the property of Hastings and its affiliates. This presentation is intended solely for the use of the persons to whom it has been delivered and is not to be reproduced, disclosed or distributed to any other persons. The information contained in this presentation is being made available to a limited number of sophisticated/institutional investors for informational purposes only and neither Hastings, nor any of its employees or related bodies corporate accepts any responsibility for or makes any representation or warranty as to the truth, accuracy or completeness of the information contained in it. This presentation does not constitute an offer from Hastings or its related bodies corporate to issue or arrange to issue, financial products and should not be relied on as financial product or investment advice. This presentation has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person or entity. Before making an investment decision, you should consider, with or without the assistance of a financial adviser, whether any investments are appropriate in light of your particular investment needs, objectives and financial circumstances. Statements contained in this presentation may be forward looking statements. Such statements are inherently speculative and always involve some risk and uncertainty as they relate to events and depend on circumstances in the future, many of which are outside the control of Hastings. Any forward looking statements contained in this presentation are based on a number of assumptions which may prove to be incorrect, and accordingly, actual results or outcomes may vary. Past performance is no guarantee of future performance. Certain information contained herein has been obtained from published sources and/or prepared by third parties and in certain cases has not been updated through to the date hereof. While such sources are believed to be reliable, neither Hastings nor any of its affiliates assume any responsibility for the accuracy or completeness of such information. None of Hastings, nor any of its related bodies corporate nor any of their respective officers, employees or advisers accepts any responsibility to inform you of any matter arising or coming to Hastings’ notice which may affect or qualify any of the information or assumptions contained in this presentation. To the maximum extent permitted by law, Hastings, its related bodies corporate and their respective officers, employees and advisers expressly disclaim all or any liability which may arise out of the provision to, or use by, any person of the information contained in this presentation. This presentation is not intended as, and does not constitute, a product disclosure statement, prospectus, short form prospectus or profile statement (as those terms are defined in the Corporations Act) or other offering document for any Hastings fund nor an offer for the issue, sale or purchase of any securities, or any recommendation for investment in any Hastings fund. The distribution of this presentation outside Australia may be restricted by law. Persons who come into possession of this presentation who are not in Australia should seek advice on and observe any such restrictions. Neither Hastings, Westpac or any other members of the Westpac Group gives any guarantee or assurance as to the performance or the repayment of capital. Investments are not investments, deposits or other liabilities of Hastings, Westpac or other members of the Westpac Group.