When IFM Investors and its fellow consortium members cracked open the bubbly last month on their successful bid for Sydney Airport following a third revised offer, it marked a bet on a vigorous and sustained recovery in passenger aviation. After all, airports globally, including Sydney, had come to resemble “parking lots for planes”, in the words of IFM Investors CEO David Neal.
Regulated assets like utilities, in contrast, have been left largely unscathed. Neal characterises the range of outcomes across IFM Investors’ portfolio of infrastructure assets: “From none to positive to some obviously sharply negative.”
IFM’s global portfolio of 33 infrastructure assets is heavily weighted to Australia, as one might expect from a firm owned by 23 Australian pension funds.
The domestic flagship IFM Australian Infrastructure Fund (AIF) started in 1995 and the International Infrastructure Fund (IIF) came about in 2004. Both are open-ended pooled funds and both will own exposure to Sydney Airport following the consortium’s successful A$23.6bn (€15.1bn) bid. The AIF will now have exposure to all major domestic airports.
Assembling a consortium bid of such a size from so many investors is a complex achievement that concentrates minds. But chasing trophy assets can blind some investors to concentration risks or encourage them to overbid.
Neal says: “If you’re not prepared to have a portfolio in illiquids that looks just slightly off optimal diversification for a little while, you’ll never move. These assets don’t change hands very often.”
Most importantly, the Australian fund will continue to diversify, as the CEO explains. About 10 years ago, IFM Investors developed its own proprietary risk-management tool for infrastructure investment, having concluded that modern portfolio theory or mean-variance optimisation methodologies were not suitable in this kind of real-assets context.
International expansion is an important part of the diversification strategy, and having a global presence has enabled IFM Investors to continue making bids for new assets over the period of the coronavirus – including, for example, Spanish utility Naturgy and Enwave, a district-heating company in Canada.
In Europe, IFM has interests in 12 assets, including Anglian Water and Manchester Airport in the UK, as well as Gdansk’s deep water port and Vienna Airport.
The UK government is now courting international investors like IFM to invest in key areas of infrastructure, including in renewables.
While Neal is positive on the new UK Infrastructure Bank (UKIB), which could bring much-needed expertise on how to structure risk between government and institutional investors, he would welcome more emphasis on opportunity for equity capital, rather than just debt.
As equity owners with whole or significant stakes in a variety of assets, infrastructure investors are in pole position to do heavy lifting in service of portfolio decarbonisation goals.
The firm has set itself what it believes is an ambitious net-zero emissions goal for 2050, with an interim target for 2030 of a 40% emissions reduction from 2019 levels for the infrastructure asset class. In absolute terms, this means a reduction of 1.16m tonnes of C0₂ equivalent. The target will be re-adjusted each year to take account of divestments and new investments.
But it doesn’t mean a wholesale tilt towards renewables as infrastructure investors like IFM should to be part of the energy transition, as Neal explains.
For IFM, meeting CO2 reduction targets will involve transformation of portfolio companies like VTTI, a global network of oil storage sites with exposure to emerging markets, or Colonial Pipeline, a US hydrocarbon distribution company.
This is important – the last thing IFM Investors’ shareholders would want is a portfolio of stranded energy assets. And the energy transition is a contentious issue in Australia, given its dependence on fossil fuels and a reluctance by government to move on emissions reduction.
“If we just put a capital strike on those that have carbon emissions at the moment and just go buy wind farms, that’s not really helping transition the essential infrastructure we invest in. If we don’t transition it’s going to be in someone else’s hands for quite a long time yet, because we can’t suddenly do without it.
“We need to be involved in that transition story. We’re a growing portfolio, so when we buy another asset, we’ve obviously going to buy emissions, because that’s what a manager involved in transition does. You buy a utility that’s perhaps got a carbon footprint that’s too high and you fix it. That should be our role.”
It would be wrong to think of IFM Investors as purely an infrastructure equity manager. In fact, infrastructure equity accounts for less than 45% of overall AUM, with significant portfolios in debt and listed equities (mostly Australian), and about A$1bn in private equity.
Neal now wants to expand IFM Investors’ non-infrastructure private market offering – but not with what he describes as a “me-too buyout strategy”. His idea involves a more aligned, long-term kind of private markets strategy with lower fees and less portfolio churn.
“We think we can build the kind of product which might be quite interesting for DC markets and for long-term investors in a much more aligned way than I think the frankly quite egregious way private equity is done.”
An Australian long-term private capital fund is now in development, with a view to developing an international version as a second stage.
“We’ve got a growth fund where we think the returns are higher, and we’ve got a long-term private capital vehicle,” Neal says. “Essentially, the idea here is not to try and get the 20% returns, because to get 20% returns you’ve just got to do lots of aggressive stuff; you’ve got to keep on recycling that capital, you’ve got to take on the risk of being able to reinvest it. So we’ll be targeting 14-15% with good-quality businesses that want a good, stable long-term partner on the shareholder register with them.”
Making haste slowly was a common motto of the ancient Greeks and Romans – referring to strategic balance between speed and diligence. IFM understands this well as an ultra-long-term investor – its average holding period for an asset is 11 years, and that only includes those that have been sold.
As it moves into new areas like private assets for DC pensions internationally, it will need to prove to its end-investors that it can deliver value in the long term, and investors must have the patience to see it out.