The coronavirus pandemic wreaked havoc among airport assets, but it wasn’t all bad for infrastructure holdings, AustralianSuper says. Ports, for example, held up surprisingly well.
Despite prevailing pandemic-induced uncertainty, AustralianSuper stepped up its investments in US toll roads in December 2020, acquiring a 25 per cent stake in what are known as the Chesapeake toll road assets of Greater Washington.
Along with UniSuper and Canada’s CPP Investments, AustralianSuper bought a 50 per cent combined stake. The transaction was valued at US$2.1 billion (EUR2.7billion), with AustralianSuper’s share of the acquisition worth more than US$1 billion.
“Our infrastructure portfolio has held up quite well during the pandemic”, says Nik Kemp, Head of Infrastructure for the $215-billion AustralianSuper.
“The role of infrastructure hasn’t changed because of the pandemic. Infrastructure has actually performed well throughout,” he says.
The role of infrastructure hasn't changed because of the pandemic. Infrastructure has actually performed well throughout [it]
AustralianSuper allocates around 11 per cent of its funds under management to an infrastructure portfolio, valued at just over $23 billion – twice as much as real estate.
Around half of these assets are direct holdings, the others are either co-investments or with fund managers.
Kemp told [i3] Insights: “The portfolio has been quite resilient through COVID-19. There is exposure to airports – which have been impacted – but there are other assets which have done particularly well, and we benefit from them.”
Performance differs from sector to sector. Seaports have performed better than expected, while airports have confounded the conventional wisdom that they offer a safe performance.
Of toll roads, Kemp says their performance is dependent on where they are located and the particular assets themselves.
“Australian toll roads have been fairly resilient, although, at COVID’s height, we saw a substantial drop in patronage during lockdowns,” he says.
“Today, we are seeing traffic recovering and rising above pre-pandemic levels.” Kemp describes the recovery as ‘pretty much where we expected it to be’, because Australia did not lock down nearly as long as other countries.
In Australia, the fund owns stakes in Westconnex in Sydney and Transurban Queensland, which manages a network of toll roads in Brisbane.
“US toll roads are operated under a different model, with variable pricing or a managed toll lanes model,” Kemp says. “Tolls go up and down depending on traffic congestion, so naturally they are more highly sensitive to lockdowns.”
Aside from its newly-acquired Chesapeake toll roads, AustralianSuper has an indirect interest in the Indiana Toll Road, in Indiana, and in Mexico through Aleatica, a subsidiary of IFM Investors.
“The one that surprised me is our port assets,” Kemp says. “Our ports have generally outperformed our expectations.
“It shouldn’t have surprised actually. People are not spending money on services, entertainment or travelling. Instead, they are spending money on goods. So it makes sense that the ports are doing much better than expected.”
Last year, AustralianSuper purchased a joint stake in Peel Ports of the UK from the Peel Group and Deutsche Asset Management. Peel Ports is described as the second-largest port owner in the UK.
The transaction price was not disclosed, but was reported to be under £1 billion ($1.82bn).
The one that surprised me is our port assets,” Kemp says. “Our ports have generally outperformed our expectations.
“It shouldn’t have surprised actually. People are not spending money on services, entertainment or travelling. Instead, they are spending money on goods. So it makes sense that the ports are doing much better than expected
Peel Ports owns and operates the Port of Liverpool and the Manchester Ship Canal, said to be valued at £4 billion. These handle around 70 million tonnes of cargo annually and control some 15 per cent of total British port traffic.
In Australia, AustralianSuper has significant exposure to ports. It has held a 20 per cent stake in NSW Ports, which owns the Port Botany and Port Kembla ports, since 2013, and has an indirect exposure to the Port of Brisbane.
In comparison to ports, airports generally are doing poorly due to heavy restrictions on international travel.
“Most of our airports in Australia are held through IFM Investors,” says Kemp. “And Australian airports are generally doing better than those in other geographies.
“Australia’s domestic airports are up and running, although there is still some way to go before performance is back to the pre-COVID level.
“For me, the question is not whether airports WILL recover. I think they will. The question is how long it will take to get back to the expected patronage level.”
AustralianSuper has exposure to Perth Airport, Brisbane Airport and the Australia Pacific Airports Corporation, which owns Melbourne and Launceston Airports.
Offshore, it has an indirect interest in Manchester Airport Group in the UK, which owns and operates Manchester, London Stansted and East Midlands airports.
Thanks to the construction of the fund’s infrastructure portfolio, better or steady performers such as regulated utilities, railways, social and other assets offset poor performers.
In 2016, AustralianSuper partnered with IFM to buy half of Ausgrid, the largest electricity distributor on Australia’s east coast, from the NSW government for $16.2 billion.
Overseas (through IFM) it has a stake in the Spanish company, Aqualia, the fourth-largest water management company in Europe, servicing more than 22.5 million people. IFM bought a 49 per cent stake in the company for EUR1,024 billion ($1.6 billion) in 2018.
It has also co-invested with Brookfield Infrastructure Partners in a US regional railroad operator, Genesee & Wyoming (G&W).
In 2019, Brookfield and Singapore’s GIC paid US$8.4 billion to take G&W private. The company operates a portfolio of 120 short-line railroads, predominantly in North America.
One of AustralianSuper’s bigger investments is its participation through IFM in the acquisition of Buckeye Partners of the United States for US$10.3 billion in 2019.
Buckeye’s assets include almost 10,000 kilometres of gas and oil pipelines, with more than 100 delivery locations and 115 liquid petroleum product terminals.
Kemp says Buckeye has other operations, including gas, but that generally the fund will invest less in carbon-intensive assets in the future.
“We are broadening out of traditional infrastructure into newer sectors,” he says. “Over the last 12 months, we have deployed quite a bit of capital into the energy-transition world.
“Our intention is to at least maintain our allocation to infrastructure. Ideally, we want to increase it, but much is dependent on the opportunities we see around the world, and the ability to deploy capital.”
Onshore vs Offshore
Around 50 per cent of AustralianSuper’s assets are located in Australia, with the expectation that, over the next few years, the proportion of assets outside Australia will increase to around 60 per cent.
“We see more opportunities offshore,” says Kemp. “The world is a much bigger market, so we will see more capital going offshore. We will look around the world for investment prospects.
“Our focus is on geographies where we are able to invest large amounts of capital. We think markets like the US and Europe will continue to provide good investment opportunities.”
Despite opening an office in China some years ago, AustralianSuper does not own unlisted assets in China or elsewhere in Asia.
“There is no reason why we wouldn’t look to Asia,” he told [i3] Insights. “We still have our office in China, but we don’t have infrastructure people based there.
“It is really important to have infrastructure teams in our target investment markets. They are the ones who will see the opportunities for investing in infrastructure in these markets.
“By the end of this financial year, we expect to have 20 people across the globe in infrastructure. This number does not include our support teams, like legal, tax and risk.
“It takes up to 10 people to support the core infrastructure team on each transaction. And we could be working on three or four transactions at once.”
Notwithstanding a drift overseas – which is necessary to deploy the mountain of cash it manages, which is growing in the billions, including more than $1 billion in monthly member contributions alone – Kemp says AustralianSuper will continue to invest in attractive Australian opportunities.
This is part I of a two-part interview with Nik Kemp of AustralianSuper. Keep an eye out for part II in the coming weeks, where Kemp speaks about opportunities in the energy transition.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.