Real assets not overpriced, if you know where to look - AVCJ Forum

"If you look around the world you see people paying ridiculous prices which give the impression that there is too much capital chasing too few deals - Australia is a case in point," said Niel Thassim, head of the private funds group in Asia for Brookfield Asset Management. "The reality is that 80% of the capital going into real assets is chasing 20% of the deals and it's the low-hanging fruit."

Australia has emerged as a prime target for domestic and foreign institutional investors on the back of several large-scale privatizations of publicly-owned infrastructure assets. In April, Hastings Fund Management and China Merchants Group paid A$1.75 billion ($1.6 billion) for a 98-year lease on Port of Newcastle. This followed a similar A$5 billion deal for Port Botany and Port Kembla, which went to a consortium of institutions led by IFM Investors.

More privatizations will come over the next 2-3 years, but the valuations are likely to be rich. The recent ports transactions went for multiples of 25x forward earnings. The intensely competitive landscape draws parallels with Europe where core, regulated, developed market infrastructure - which generates predictable, inflation-linked revenue streams from stable customer bases - has attracted investors in their droves.

These valuations are encouraging some groups to look elsewhere. "The most interesting opportunities for us at the moment are in emerging markets because the deal flow in the developed world does not make sense to us from a pricing perspective," said Natalie Meyenn, head of private equity at Australia-based MLC Investment Management.

She identifies forestry in Latin America - MLC is looking at several forestry investments in emerging markets alongside US endowments - and agriculture in Australia and New Zealand as the most attractive parts of the real assets space. Agriculture has proved challenging for Australian pension funds in the past, but MLC is assessing potential opportunities in conjunction with National Australia Bank, its parent group and one of the country's largest agriculture lenders.

For Brookfield, value can be found in areas where the path to high-quality assets is complicated by operational obstacles, such as a challenging capital structure or industries going through consolidation or transformation. Thassim singles out energy and infrastructure and agriculture as his top picks.

"The underlying assets are great but the ability of investors in different parts of the world to access, assess, underwrite and execute makes it very difficult," he added.

Real assets in developing markets present a different risk-return dynamic to that found in the developed world, hence the pent up demand for the transparency and predictability of ports in Australia and water operators in the UK. But it is possible to achieve a degree of comfort. "We are not scared of risk," Meyenn said. "Our best investments have been where we have taken quantitative risk that we understand."

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