Institutional investors know a good thing when they see it, according to Kurt Lemke.
Lemke, Infrastructure Partners Investment Fund (IPIF) senior adviser, told a NZ audience last week that there is a “deep, dark ocean” of investors who have a strong preference for assets “based on real stable cashflows”.
He said large institutional investors tend to be long-term holders of quality unlisted infrastructure once they get their hands on the assets, which feature steady inflation-linked cashflows, low volatility and portfolio diversification benefits.
Historically, the asset class has also held up well during market downturns, Lemke said. During the global financial crisis, for example, unlisted infrastructure bucked the almost universal slump, recording positive annual returns amid dramatic share market reversals.
“Unlisted infrastructure is the only safe haven asset based on its intrinsic cash flow value,” he said.
But given the narrow range of assets under the tightly-defined umbrella of core infrastructure and large minimum figures involved (typically $25 million plus ongoing commitments), only mega-investors tend to be members of the club.
As reported here last month, IPIF set up in 2016 to bridge the unlisted infrastructure gap for smaller investors with a fund-of-funds offering.
Currently, the A$140 million IPIF invests in four underlying funds: the Utilities Trust of Australia (UTA), managed by Wellington-based, Morrison & Co; First Sentier’s Global Diversified Infrastructure Fund Hedged Feeder Fund 2; AMP Capital Diversified Infrastructure Trust (ADIT); and, the Macquarie-run The Infrastructure Fund (TIF).
IPIF has about a 60 per cent exposure to the Morrison & Co UTA fund.
In total, the underlying IPIF portfolio holds 32 assets with Australian airports representing 40 per cent of the value.
Nicole Connolly – the IPIF founder who fronted the NZ roadshows along with business partner, Jonathan van Rooyen, and Lemke – said the heavy weighting to airports was a deliberate strategy rather than an outcome of the underlying fund manager decisions.
Connolly said airports had several characteristics that were particularly attractive to unlisted infrastructure investors.
She said airports are more-or-less monopoly assets that provided essential services that generated long-term, “inflation correlated” cash flows from two revenue streams (aeronautical and ancillary airport services such as parking, retail etc).
Although, ultimately, Connolly said airport value was tied to passenger volume, which had seen strong growth in Australia through economic cycles.
While future passenger growth-rates are projected to fall – especially among domestic travelers – the Australian airport market should still continue to increase over the next decade and beyond, she said.
According to van Rooyen, who is also IPIF chief investment officer, the obsession with Australian airports is partly due to their special features but also because access to global equivalents is either via listed markets, government-owned or in unproven jurisdictions.
“In the US most airports are owned by governments,” van Rooyen said. “However, there are many privately-owned airports in Japan, for example, we could consider but it’s hard to justify in a country that has competition to air travel through high-speed trains and an ageing population.
“And where is the Gold Coast of Japan?”
Nonetheless, there could be airport opportunities in emerging markets, he said, which IPIF may invest in at some point “if we can find the right manager”.
Aside from airports, IPIF holds a range of other infrastructure assets including seaports, energy providers (distribution and transmission), water utilities (such as the Sydney desalination plant) and even a lucrative Australian property registry business.
Lemke said despite the relatively small spread of assets, IPIF was “more diversified than any sovereign wealth fund” across unlisted infrastructure.
“It’s not always physically possible to diversify a lot in unlisted infrastructure,” he said.
Van Rooyen said industry surveys show institutional investors rate unlisted infrastructure highly for its portfolio diversification benefits and income reliability.
However, he said growing competition in the market has sparked valid concerns about asset valuations of late.
The IPIF investments, though, are “undervalued compared to recent transactions (under competitive bidding processes) due to each fund having built up its portfolio over a long period”, the NZ investor presentation says.
“Overall, our underlying investments have materially lower vintage risk,” IPIF says.
Connolly said IPIF had an allocation to a new tranche of an underlying fund with an existing investor due to redeem.
Despite the illiquid nature of the IPIF assets, the fund does have a mechanism to help investors sell units if they ever want to bail out.