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Australian superannuation funds are increasingly pursuing co-investment opportunities with managers of real assets, hoping to benefit from lower fees while developing greater in-house expertise.
Consultants say that offering fee-free co-investments is now an important way for managers to attract these mid- to large-sized investors into their funds.
“In infrastructure, the agreement is often: if you invest in our fund, we’ll offer you co-investments that have nil or minimal management and performance fees,” Manish Rastogi, head of infrastructure with Frontier Advisors in Melbourne, told AsianInvestor.
An example of such an arrangement would be a global infrastructure manager purchasing a large digital infrastructure asset, putting half of the equity investment into a fund, then offering the other half as co-investments to existing Limited Partners (LP) in the fund – with zero or much lower fees attached.
Claire Simpson, Co-Head of Infrastructure Research at Australian investment adviser JANA, said that co-investments by Australian superannuation funds could result in cuts in total fees by up to half, adding that the process is particularly popular with larger funds that seek out the world’s largest infrastructure and real estate managers.
Tight regulatory scrutiny of fees paid by super funds to managers in recent years has also seen downward pressure on fees. Typical management fees for core infrastructure investments are now well below 100bps, said Rastogi.
Among core real estate investments, manager fees had fallen from 65bps to 45bps in the last two years, according to Mary Power, a senior consultant at JANA in Melbourne. Niche sector investments were typically 80bps to 100bps with a performance fee, she said.
Troy Reick, CIO of Australian superannuation fund LGIAsuper, said the fund runs co-investments with several real estate and infrastructure managers at low to zero fees, compared to high headline fees for commitments to those managers’ funds. He saw this approach as valuable in asset classes that were more expensive to manage, including private capital and credit.
“Co-investments provide funds of our size with the ability to add investments in attractive areas with world-class managers, and to do so at a more attractive fee outcome,” Reick told AsianInvestor.
In Australia, the co-investment approach is generally limited to a handful of superannuation funds for whom it is cost effective to maintain an internal investment team devoted to direct or co-investing, or both. Rastogi pointed to AustralianSuper, Aware Super, and Hostplus as examples.
The co-investment approach does come with extra requirements like “legal, tax and accounting [costs], to go along with increased internal resourcing and a need for stronger governance by the fiduciaries,” said Reick.
Rastogi said that mid- to large-sized global infrastructure managers such as Macquarie Infrastructure and Real Assets (MIRA), Brookfield, and First Sentier Investors are among the global managers large enough to offer co-investment opportunities alongside their funds in this way.
The take-up of co-investments is particularly likely in sectors like renewables, energy transition, and digital communications infrastructure. “These are proving to be very popular and managers are competing hard for assets,” Rastogi said.
For now, investors seeking exposure to Asia are still more likely to seek fund investments rather than going it alone. Direct and co-investment opportunities remain more likely in more developed markets in Europe, US, and Australia, said Rastogi. “Investors are less willing to stick their neck out where they believe their capital could be at risk,” he said.
The growth in co-investments with fund managers is part of a wider trend towards investors seeking partners for direct investments in Asia.
In Asia, Canadian pension fund the Ontario Municipal Employees Retirement System (Omers) is now targeting opportunities in renewables and digital communications, communication towers, energy meters, data centres and satellites.
In 2019, Omers Infrastructure took a stake in Indinfravit, an Indian toll road platform, alongside CPPIB, Allianz and Indian corporate Larsen & Toubro.
Alastair Hall, global head of investment strategy and partnerships at Omers Infrastructure in London, told AsianInvestor that a greater degree of collaboration in its investment approach was a key strategic priority in Asia.
Omers Infrastructure is looking for platform investments, possibly with assets in multiple countries, that would help it expand its presence across the region. It is also actively targeting other investors in the region as potential partners.
“We have a good dialogue with the key players in the main geographies we are targeting,” Prateek Maheshwari, Omers Infrastructure’s Asia head in London, told AsianInvestor, adding that it collaborates with Omers' other investment entities, including Omers Capital Markets, Omers Private Equity and Oxford Properties, its real estate arm.
Christopher Curtain, Omers Infrastructure’s head of Asia Pacific in Sydney, told AsianInvestor that Omers Infrastructure was prioritising Asia Pacific over Europe, a well-developed but crowded market. “In Asia Pacific there is a lot of capital to be invested, but there is a lot of capital required. It’s one of our key target areas to grow the renewables business. In Europe, the sector is very well developed and there is less room [to invest],” he said.
In early June, Omers Infrastructure told AsianInvestor that part of the reason for its increased emphasis on collaboration was to pursue investment opportunities earlier in the development cycle.
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