High valuations push Australian LPs up the infrastructure risk curve

“Are higher prices for core infrastructure pushing institutional investors into non-core infrastructure? That is probably the case,” John Peterson, illiquids portfolio manager at LG Super, told the Infrastructure Investors Forum Australia in Sydney. While LG Super has accumulated core positions over time as a capital appreciation play, Peterson noted that a recent commitment to a specialist solar power fund was in part driven by unattractive pricing in the core space.

“Core infrastructure assets are scarce and when bought they are never sold. If you have already got these assets that’s great and you can pass [on new deals] if that is your view on pricing,” said Brent Snow, associate portfolio manager for infrastructure and real assets at First State Super. He added that First State Super has become more selective in deploying capital over the last few years, a strategy that has seen it move up the risk spectrum.

Future Fund is traveling in the same direction, with data centers and telecommunications infrastructure now on the agenda. However, not all investors advocate turning to less established segments of the market at the expense of core infrastructure, particularly given the low interest rate environment globally means fixed income is not as defensive as it once was.

“If you say that it’s too expensive, you don’t have core exposure and you will go up the risk curve, then you are missing out on something,” said Diana Callebaut, head of infrastructure at CBUS Super. “There is a place for core infrastructure.

Future Fund does not have an allocation to emerging markets infrastructure at present, but James Fraser Smith, a director for infrastructure and timberland at the sovereign wealth fund, has been tasked with establishing the risk-adjusted returns for such investments. He sees emerging markets exposure as an almost inevitable consequence of the pricing dynamics in Australia.

“There is more capital for the core-plus space and there will be more going forward, so it’s hard to get that premium return,” Fraser Smith said. “The logical next step is looking at emerging markets.”

First State Super is in a similar position. The fund’s investment mandate stipulates a minimum allocation to Australian infrastructure of 50% - the maximum is 100% - but current exposure is only 40%. While there is a desire to be more active domestically, not least because the fund would go direct and thereby reduce fee leakage, Snow said there are not enough deals available.

First State Super has been increasing its allocations to offshore infrastructure and about 20% of its portfolio is deployed in emerging markets. This includes renewables in Southeast Asia, based on the view that the risk-return was superior to that for Australian renewables. The target return for emerging markets is 15% plus.

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• Topics
• Australasia
• Infrastructure
• Infrastructure
• LPs
• Australia
• Future Fund