A strong year for infrastructure equity globally last year in terms of operating and financial returns, as well as a persistent low interest rate environment, is helping drive investor demand for infrastructure assets.
But the global pool of infrastructure assets is broadening, as societal shifts define the assets of the future and investor demand fuels the sector.
As Julie-Anne Mizzi, Global Head of Infrastructure Health at AMP Capital explains, there’s a wall of capital looking for infrastructure assets.
But there is a limited supply of core assets to which these funds can be applied, in part due to a significant slowdown in the privatisation of infrastructure assets in Australia and offshore. For instance, there have been $26 billion in asset sales in New South Wales over the last four years, but this pipeline is slowing.
As a result, infrastructure investors are looking for assets outside the traditional road, rail and utilities investments that once dominated the sector. Changing consumer behaviour and expectations are also prompting a shift in what is defined as infrastructure.
“If you were told the water was being turned off for six hours, you’d probably fill the jug and some bottles, but it wouldn’t have a huge effect. But if the internet were to go down for six hours there would be an outcry and businesses would seek compensation,” says Mizzi.
Now new assets such as data and logistics centres are now part of the infrastructure landscape. Sophisticated investors understand these assets have a similar return profile to traditional infrastructure, for instance long-term cash flow, stable, predictable revenue, low operational risk, high earnings before interest, tax, depreciation and amortisation (EBITDA) margins and, sometimes, monopolistic characteristics.
Along with new asset types, investors are also looking for assets that have strong growth prospects and actively managing assets to add value over time. This contrasts with traditional infrastructure assets such as roads, for which there is limited opportunity to add value, aside from maintenance.
Melbourne Airport, which AMP Capital is invested in, is one example. Airline travel is changing from the hub-to-hub transport model that dominated in the past, whereby if someone wanted to go from Singapore to Melbourne, they would typically have flown from Singapore to Sydney and then on to Melbourne. Now, smaller planes are travelling from destination to destination, which is benefitting airports such as Tullamarine.
“We have seen strong growth in international travellers to that airport, which is helping to drive returns,” says Rory Shapiro, Assistant Portfolio Manager, Infrastructure.
“We look to drive value for the assets we manage, it’s not about just buying and holding and Melbourne Airport is an example. We can drive cost efficiencies as we own a number of airports and we can share learnings between management teams,” says Shapiro.
While in large part infrastructure assets have historically come to market as a result of government privatisations, other forces and factors are now driving investment opportunities, explains Jiren Zhou, Investment Director, Infrastructure.
More opportunities now arise through public private partnerships (PPP) or private transactions, where seed investors look to exit investments in shorter timeframes in order to recycle their capital.
For example, a construction company may take an equity stake in a greenfield project to demonstrate their alignment with other stakeholders. But when the project completes they are no longer the natural owners of these assets and seek to sell down their stakes to recycle capital, Zhou explains.
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