As China pushes to set up a regional infrastructure bank to lend for major projects, it's worth revisiting just who will invest in the bulging pipeline of Australian infrastructure assets coming to market in the next 12 months.
The obvious candidates are Australia's superannuation funds, which manage some $1.8 trillion in assets but remain heavily weighted towards more liquid assets such as stocks and bonds. Super can, and should, be turning savings into investment that can boost economic growth.
Some prime candidates say that keen competition for trophy assets such as the Port of Botany have pushed valuations beyond reasonable levels. Port Botany and Port Kembla sold for $5.1 billion, a deal that many saw as a new high water mark for infrastructure deals globally.
"We have been engaged in looking at the opportunities for a number of high-profile assets that traded at very high multiples," says the Future Fund's chief investment officer, Raphael Arndt.
"We decided not to go to the finish line," says Arndt, who was previously head of infrastructure at the nation’s $104 billion sovereign wealth fund, managing $7.7bn in assets.
So Australia's largest single investor examined the assets that came to market in the past year but couldn't see good value at prevailing multiples of up to 27 times earnings.
The Future Fund has not shied away in the past from structuring deals to suit its requirements. When it initially considered interests in Perth and Melbourne airports, it was via managers who proposed illiquid holding structures that would have locked in the owner forever.
Instead, the wealth fund decided to acquire the assets directly and then award flexible mandates to managers who are paid fixed fees. The fund itself is not locked in and could sell the assets if need be.
A lack of suitably structured projects for institutional investment was one of the key issues highlighted by super funds recently in a report prepared for the Financial Services Council. The funds also said the bidding processes were “inconsistent, complex and expensive”.
The FSC, which represents for-profit super funds, suggested that setting up an early-stage consultation process between funds and the states could help with structuring privatised assets. Investors are focused on mature “brownfields” assets where the cost and risks of construction have already been borne by government.
Arndt says the Future Fund will look at the state government privatisations coming up, but will need to remain “prudent” in how the prices stack up relative to other asset classes. It sounds reluctant to commit.
Investors want greater transparency from infrastructure managers to show how much returns reflect added value over and above returns due to changes in bond yields or GDP growth.
The government-owned assets slated for sale include the $5 billion Port of Melbourne -- the last remaining publicly owned port on the eastern seaboard -- and the New South Wales electricity network assets.
The Queensland government is seeking advisers for over $33bn of asset sales of electricity distribution networks, electricity generators and ports, though both that process and NSW will depend on upcoming state elections.
In the tough recent competitions, for Queensland Motorways in Brisbane and the ports of Botany and Kembla, the gap between the winning consortium and the second placed consortium was actually very small at around 1 per cent of a $5bn to $7bn asset.
One member of the winning consortium in both of those deals, industry fund Australian Super, says multiples that measure against current earnings are not the best yardstick for very long-life assets.
“We feel reasonably well informed about value in our eyes… We are all prudent,” Jason Peasley, head of infrastructure, told me.
Peasley doesn’t have a strong feeling on whether the super industry, with its deep pockets and long-term investment horizon, has a duty or obligation to finance domestic infrastructure. “There may be a social benefit. If it coincides that there are Australian opportunities that fit our mandate, all well and good.”
Australia’s largest industry fund is slightly underweight its preferred allocation to infrastructure and has about $8 billion in the sector, after bringing management in-house over the past year.
Value, it seems, is in the eye of the beholder.