Australian superannuation pension funds are increasing their infrastructure allocations, particularly in the communications and digital sectors, following a year where Covid travel restrictions limited investment opportunities.
Manish Rastogi, a principal consultant and infrastructure specialist with Frontier Advisors in Melbourne, told AsianInvestor that infrastructure allocations by Australian super funds had increased from 5% to 10% of total assets under management (AUM) before the pandemic to between 7% and 13% today.
He said that real estate allocations had remained stable over that period.
“Infrastructure rather than real estate has sucked up the majority of those new flows because Australian investors recognise the resilience and stability of the infrastructure asset class,” he said.
This perspective was supported by Troy Rieck, LGIAsuper's chief investment officer. He told AsianInvestor the Brisbane-based fund had been increasing its allocation to infrastructure over the last year, funding the allocations by selling down alternatives holdings. Rieck said the fund targets returns between 8% and 12% for these investments.
During the pandemic super funds focused their attention away from expanding infrastructure allocations and towards shoring up stability and liquidity.
THE BOUNCE BACK
Travel bans made it hard to conduct the in-person due diligence that many funds are seeking for this sector, but from the second half of 2020, interest had recovered fast, Rastogi said.
He said he knew of one global infrastructure manager, which he declined to name, that had recently raised a fund of roughly £500 billion ($705.79 billion) entirely virtually, without meeting any of the LPs in person.
Claire Simpson, co-head of infrastructure research, at JANA in Melbourne, told AsianInvestor the striking trend among super funds over the last year had been increased allocations to communications and digital infrastructure, which today accounted for between 5% and 10% of a super fund’s infrastructure allocation, and could be up to 20% in some cases, up from less than 5% at the start of 2020.
The increase had come particularly among super funds that are growing fast, such as through mergers, which have a significant deployment appetite.
She said funds’ interest in the communications and digital infrastructure sector divided into core and riskier opportunities.
Examples of core opportunities, where investors expected 6% to 7% total internal rate of return, included buying communication towers. Riskier opportunities, such as rolling a fibre network out across a city involved large capital expenditure and would be characterised by low yields for many years, meaning investors targeted IRRs closer to 15%.
Simpson said that JANA recommended an allocation of between 10 and 20% to clients. Currently super funds typically allocated between 30% and 50% of infrastructure spend to Australia, with roughly 30% in Europe, 15% to 20% to the US and roughly 5% to Asia.
While Rieck declined to say how much infrastructure exposure LGIAsuper is targeting, he noted that infrastructure is the fund’s current favoured asset class and was preferred to property.
“The [infra] programme has been working very well, it is where marginal dollar is going.”
He said the allocations are 50-50 mix between domestic and foreign and are entirely managed externally via managers such as Equis, EQT, I Squared, Lighthouse Infrastructure and Palisade. Infrastructure and property collectively comprise 17% of the fund, and the fund is looking to add to that allocation and the manager line-up shortly.
LOOKING FURTHER AFIELD
Rieck said he continued to look beyond Australia for new [infra] opportunities.
“We like a good rule of law, stable tax environment and most of all good prices,” he said. He singled out ISQ Growth Markets Fund, the first emerging markets-focused infrastructure fund from I Squared Capital, as an example of how infrastructure allocations continue to evolve.
“We like the thematic approach, and I Squared has done an excellent job in acquiring assets, and has generated [strong] returns in doing so,” noting that existing funds run by this manager were invested in toll roads in India and hydro in Latin America - both sectors that Rieck was interested in.
Many of the recent allocations have been beyond Australia, where the market is crowded and competitive, according to Rastogi.
“Australian super funds’ portfolios had been heavily focused on Australian infrastructure and Australia had a dearth of infrastructure opportunities leading into 2021, so investors were sourcing new investment from abroad,” he said.
Rieck pointed to the social and environmental benefits of infrastructure investing for LGIAsuper.
“We like to invest alongside our members and their employer sponsors here in Australia, and Queensland in particular. Our members like to see their money hard at work for them in the communities in which they live”.
As an example he pointed to Sunshine Coast Airport in Brisbane, Australia’s first carbon neutral airport. Last year the fund increased its holding to 50%. He noted that the airport focused on domestic tourism, had no exposure to international and freight, and had a big land bank attached to it that could provide opportunities for property development.
“[The purchase] provided an opportunity to secure long-duration assets that were attractively priced. Such monopoly-like assets are not offered for sale very often, and when such opportunities present themselves, investors can secure long-term investments,” he said.