Victorian Funds Management Corporation, a A$38 billion ($38 billion) sovereign fund representing government authorities for the Australian state of Victoria, is increasing its exposure to global infrastructure opportunities.
Justin Pascoe, Melbourne-based CIO, says VFMC established a dedicated infrastructure team four years ago as part of developing a ‘bucket’ of assets dedicated to protecting the fund against inflation, along with inflation-linked bonds and real estate.
Andrew Elliott, deputy CIO at VFMC, recently spoke to AsianInvestor about the role of infrastructure in the group’s portfolio. The interview with both Pascoe and Elliott is available in the March edition of AsianInvestor magazine. Below we highlight Elliott’s views on his area of responsibility.
AI: What’s your role at VFMC?
Andrew Elliott: I joined four years ago as head of infrastructure. VMFC had some legacy positions but I was hired to set up a team and invest directly by ourselves. Privatization programmes in Australia and elsewhere has made infrastructure an important area for superannuation funds. Infrastructure provides us with long-dated assets with a good link to inflation.
What was your take on infrastructure investing prior to the GFC?
A lot of money going into the sector was going to high-fee, poorly aligned products. These were not stable, long-term investments, but more styled after private equity, relying on gearing and short-term exits. That is not what we wanted.
So we built our own team. We are among the first super to do so. Before us, only investment banks had this sort of expertise, although today the Future Fund has a team that’s even bigger than ours.
How has your team tackled infrastructure managers?
We built our own team partly to address the issue of fees, but more importantly, to address agency issues. We want boring, core infrastructure assets: quasi-monopoly assets in central services; brownfield assets; assets without excessive gearing or structuring. We can own these ourselves.
We take meaningful stakes so that we have the ability to say ‘no’. We can choose to invest with partners who share similar goals. So far, the team has delivered. There have been no big writedowns. We have achieved CPI-plus returns even during the GFC.
Has your relationship to other infrastructure managers changed?
The infrastructure market in Australia is at a crossroads. Smaller LPs are struggling with the asset class. They want it, but don’t know how to implement a strategy. Investors have learned lessons from the GFC and are now still in a hiatus. Third-party managers, meanwhile, have retreated. They don’t want to be in this space if they can’t get 20%-plus IRRs. There is an opportunity for someone to come in with a genuine offer. We sense other infrastructure managers are just waiting for investors to give in. The industry is in a state of flux.
What are you hearing from global infrastructure managers these days? How are they trying to win back your business?
As regards offshore allocators, we sense they are stressing their ‘independence’ from investment banks.
Where have you invested so far?
What we’ve done is mostly offshore, but that has not been a conscious decision. We just felt the Australian market has become overheated. The most important thing about investing in infrastructure is the price you pay, and recently, the best prices have been found in Europe.
What about the United States?
There is no PPP [public-private partnerships] in the US. We will go in, but only with a big local manager with local experience. It’s a difficult market. The politics are murky when you have to get down to the level of city councils, which control most of these projects.
How big is infrastructure within VFMC’s total AUM?
Infrastructure is still a small part of our portfolio. Our strategic asset allocation is 8% and we’re about halfway there. There’s plenty of cash to deploy. There have not been a great number of transactions. We had hoped to see prices come down during the GFC but that didn’t happen.
What would you say to peers in Asia that are keen to get into infrastructure?
We are clear about what we want. Infrastructure is not a subset of private equity. We know why we are in it. From that certainty flows the correct implementation. If an institution wants to go direct, it needs to be of enough size. The challenge then becomes whether you can get a meaningful allocation. You need to be patient and use your size to negotiate with managers. Our internal team makes us a credible co-investor for a lot of managers.
Implementation and execution is also critical. If we give one cliché of advice, that is it. Control, low gearing, agency risk…all of these boil down to that phrase: implementation and execution.