Australian superannuation funds, keen to boost their allocations to infrastructure, are increasingly looking abroad – notably to emerging Asia – as opportunities grow scarcer at home.
Demand for such assets – especially those with environmental, social and governance (ESG) aspects, such as renewable energy – has driven yields down by a third, as pensions seek to raise their infrastructure exposure to, typically, 10% of their total portfolio, consultants told AsianInvestor.
“We see lots of potential opportunities emerging in Asia, given it has a huge demographic story,” Sonya Sawtell-Rickson, chief investment officer of Melbourne-based super fund Hesta, told AsianInvestor. “Last year we executed our first co-investment in India and invested in our first Asia-focused infrastructure fund.”
In recent years the A$52 billion ($36.7 billion) fund for health and community service workers has been doing research into Asia for its real asset portfolio, Sawtell-Rickson said. Its 2019 annual report showed allocations to six infrastructure vehicles run by managers such as KKR and Pacific Equity Partners.
Australia is a difficult place to find infrastructure investments, Sawtell-Rickson pointed out. While there are still renewable assets on offer, most lack the necessary contract lengths for Hesta, which aims to achieve net zero emissions in its portfolio by 2050.
Moreover, investments into Asia are likely to improve the performance of the infrastructure portfolio, she said, declining to reveal return targets for either Australian or Asian investments.
Renewables make up for 5% of Hesta’s infrastructure assets, and Sawtell-Rickson said the fund was close to its target infrastructure allocation. Hesta’s default MySuper fund option has a target allocation of 12%.
Most Australian super funds have a target infrastructure allocation of around 10%, but typically have only reached between 5% and 7%, said Nick Kelly, senior investment consultant at Willis Towers Watson.
Some funds are a way off that. The ADF Super fund of the Commonwealth Superannuation Corporation (CSC) has 3.2% allocated to infrastructure, but the institution is buying Asian assets in that space.
CSC in June invested $50 million to refinance a satellite that delivers broadband to 140 million people in remote Asia Pacific communities, including the Pacific Islands, Indonesia and the Philippines, chief investment officer Alison Tarditi said. “The fund has been a pioneer in considering ESG for many years,” she told AsianInvestor.
POOR HUNTING GROUND
Ultimately, opportunities in ESG infrastructure are rare and returns poor in Australia compared to those in India, Japan, the Philippines and South Korea, said Manish Rastogi, principal consultant for infrastructure at Frontier Advisors, an investment consultancy in Melbourne.
Five years ago investors could have expected low-double-digit returns in Australia, he added. “Today they would be lucky to find a core long-term contract for renewable assets at all. If you did you would find yields of anywhere from 7% to 9%.”
A major factor for this is that Australia is on target to meet or has already met many of its state or federal targets for renewable electricity generation until 2022 and 2023, said Rastogi. In September last year Australia’s Clean Energy Regulator announced the country had met its 2020 target of 33,000 gigawatt-hours of renewable generation a year ahead of plan.
“A combination of crowding by investors and regulatory changes means in Australia [yields on infrastructure] have gone from between 8% and 12% to between 6% and 8%,” confirmed Kelly of Willis Tower Watson in Sydney.
Indeed, Asia (ex Australia) is seen as one of the few regions where higher returns are still available from the asset class. Rastogi said a core infrastructure investment in India would typically yield between 12% and 14%.
EMERGING RISK PREMIUM
And you need to receive a premium of 300 to 500 basis points to compensate for the risks in developing Asia, Rastogi said. He cited political risk, different regulatory frameworks, the legal risk around contracts, and the creditworthiness, transparency and reputation of the counterparty – including the question of whether they are backed by government support or guarantees.
Australian supers certainly won't be alone investing in ESG infrastructure in Asia. The biggest group of investors in this sector have been Canadian pension funds, led by CPPIB, Rastogi said. Life insurers in Asia and beyond are also showing an increasing appetite for infrastructure assets.
Moreover, Sydney-based manager Macquarie Infrastructure and Real Assets is looking to raise some $3 billion for its third Asia-focused infrastructure fund, reported Bloomberg in June. The fund has already secured commitments from several investors.
The company’s second fund, Macquarie Asia Infrastructure Fund II closed in April 2018 with $3.3 billion and at least 20 limited partners. It was the largest Asia-focused infrastructure vehicle at the time.
Yet despite the search for yield in Asia, some super funds are happy with lower returns on offer these days. “Infrastructure doesn’t have to generate 12% to 15% per annum to make sense,” Troy Rieck, CIO of Brisbane-based LGIA Super, told AsianInvestor in April. “In a low-return world, 7% to 8% after fees is OK.”
LGIA is another fund with infra assets in emerging Asia, but Rieck sees US infrastructure as “the 800-pound gorilla” for which everyone is waiting to open up in this sector.