Aware Super has grown its infrastructure portfolio from zero to $11 billion in just seven years. In part II of the interview with Mark Hector and Damien Webb, Florence Chong speaks about the strategy, how the portfolio fared during the pandemic and potential new asset classes.
Just seven years ago, Aware Super opened its now $11 billion-plus infrastructure portfolio with what was referred to as ‘a blank sheet’.
Today, the portfolio includes public hospitals, a city light rail, a convention centre and state land registries. A number of these assets have come from participation in public-private partnerships with state and federal governments.
Unlike its peers, Aware Super has little exposure to toll roads and airports. It did not participate heavily in early rounds of the privatisation of public assets in Australia.
So, when the COVID pandemic hit, the super fund was able to count its blessings. The impact of COVID on its overall portfolio has, so far, been minimal.
“The two asset classes most impacted have been airports and toll roads, where people have been stopped from travelling,” Mark Hector, Senior Portfolio Manager, Infrastructure and Real Assets, at Aware Super, told [i3] Insights.
“Fortunately, we don’t have any material asset write-downs associated with such assets.”
The fund does have some ‘GDP-linked’ assets, he says, but generally its exposure, mostly through fund managers, is limited. “We happen to own less of those assets,” he says.
“We have an investment in British ports, which have experienced some blips during COVID. (But) on the whole, goods continue to be transported because they are needed even during lockdowns.”
Healthcare
In 2018, the then-First State Super joined Cbus Super and GLIL Infrastructure, a UK investment fund backed by public pension schemes, to buy a minority stake from Canada’s Public Sector Pension Investment Board in Forth Ports, a multimodal ports owner and operator. Forth Ports owns and operates eight commercial ports across the UK.
While COVID has had some impact on GDP-linked exposures, Hector says contracted and regulated components, which make up the bulk of the infrastructure portfolio, have been unaffected by COVID.
Aware Super intentionally runs a hybrid infrastructure strategy – a mix of lower and high risk. “We don’t want to just invest in high-risk, high-return assets,” he says, “because we want to make sure that, in all market conditions, we can still generate reasonably steady long-term returns.”
We don't want to just invest in high-risk, high-return assets, because we want to make sure that, in all market conditions, we can still generate reasonably steady long-term returns – Mark Hector
Unsurprisingly, the fund’s research has shown that, with an ageing population, healthcare is a growth sector. But Hector notes: “The reality is that most healthcare-style opportunities are more of the higher-risk, private equity nature. It is more difficult to source assets which can offer long-term infrastructure-style cashflow.
Aware Super is a co-investor alongside QIC in Nexus, a private day care hospital. The two funds in 2019 bought a 75 per cent stake in the chain, which owns day and short-stay hospitals around Australia.
“We are in the learning stages of looking at emerging infrastructure-like healthcare opportunities – such as potential cancer care and diagnostic imaging,” Hector says. “But we are yet to invest in these spaces.”
“Through our credit and income team we have invested in a number of assets in the healthcare and medical sectors in the private equity space,” Damien Webb, Head of Income and Real Assets at Aware Super, says.
“We were one of the lenders to Brookfield, which in 2019 bought the private hospital chain, Heathscope, for $4.4 billion.”
Webb says that through its participation in public-private partnerships (PPPs), the fund has interests in two public hospitals – New Bendigo Hospital in Victoria and Sunshine Coast University Hospital in Queensland.
In late 2019, it took a further 50 per cent stake in the $1.8-billion Sunshine Coast hospital, acquired from its partner, Siemens.
Aware Super is also part of a bidding consortium for Melbourne’s new Footscray Hospital PPP project.
Other PPP assets in the Aware Super portfolio include Sydney’s International Convention Centre and Sydney Light Rail. The fund views these investments partly as an economic contribution and partly for social good, says Webb, “but always ensuring risk-adjusted returns that are attractive for our members”.
“Cash flows from PPP social infrastructure are almost entirely from the state governments. We are not taking demand risks,” says Hector.
“Under tight contracts, the key performance indicators (KPIs) and abatements are the responsibility of the operator. There is fairly limited risk to us as equity owners, and the assets have shown themselves to be pretty stable in cashflow generation.”
Looking Ahead
Hector says it is necessary today to look beyond traditional asset classes, whether transport or utilities, to emerging asset classes. “We have to do the hard yards and the research to find new investments in a highly-competitive world. We have to be a bit bold in our approach to find value.
“For example, we had a first-mover advantage into land registries in Australia.” (Aware Super acquired 100 per cent of Victoria’s land registry for $2.86 billion and is a 30 per cent equity owner in the ARI consortium, which paid $2.6 billion for NSW’s land registry.)
As Aware Super’s funds under management continue to grow – they are projected to reach $250 billion by 2025 – the search for more infrastructure investment will intensify, both within Australia and overseas.
Recently, Aware Super’s board adopted a global strategy which entails setting up offices in key markets in both the US and Europe. With feet on the ground, the task of sourcing potential assets will hopefully become more productive and easier.
Says Webb: “We have grown to $150 billion as a fund and expect to grow to $250 billion in the next few years. As part of our evolution, we have to continually find value for our members, enhance the portfolio and deliver economies of scale.”
We have a global mandate and we will continue to have that. But realistically, with our teams on the ground in Australia, we have more of a natural focus on investing directly in our backyard – Damien Webb
He says the offshore offices will primarily help his team find direct opportunities in infrastructure, property, credit and private equity – in private markets.
“In the meantime, we have a global mandate and we will continue to have that. But realistically, with our teams on the ground in Australia, we have more of a natural focus on investing directly in our backyard.”
He adds: “When we have invested overseas, we have primarily been focused on the OECD markets of Europe and North America, and, to a lesser extent, opportunistically in emerging markets.”
Webb says that where Aware Super has gone offshore, it has tended to invest in selected funds, mandates, and joint ventures where it can make a meaningful amount of co-investment as well.
Where it invests in its own right, such as around $600 million for a 20 per cent stake in Forth Ports a few years ago, it looks for partnerships through certain managers who can make connections with like-minded partners
Aware Super will increasingly make those connections directly with global pension funds and managers looking for partnership capital on large and complex investments.
“Within infrastructure, we would like to have at least 40 per cenr of our portfolio in Australia, the balance offshore. We don’t see a broad difference in risk returns between the asset classes of Australia and OECD markets.”
The fund has a current overall weighted average strategic asset allocation in infrastructure of around 8 – 9 per cent. But that allocation will rise as the fund continues to grow, whether through mergers and acquisitions or organically.
Of relative returns between infrastructure and real estate, Webb says: “If you were to look at the broad Australian indices for unlisted property and infrastructure, clearly infrastructure has outperformed property in the last three to five years.”
This is because of the headwinds that have faced property, primarily due to an underperforming retail sector, which made up 40 per cent of the unlisted property index, he says.
In the past two years, office, too, has been facing a number of headwinds. The exceptions are the residential and industrial sectors, which, he says are ‘going gangbusters’.
“If you then look at our portfolio, I think the returns we have from property and infrastructure have been similar, due to the fact that our property exposure was very underweight retail and overweight to build-to-core industrial,” Webb says.
So far, the fund has seen double-digit returns from its infrastructure portfolio. In part, it has benefitted from capital gains, giving most investors, as Hector puts it: ‘a free kick from yield compression since the GFC’, thanks to the prevailing low interest rate environment.
“But going forward, we do see that it is going to be harder and harder to generate the same kind of returns without going considerably up the risk spectrum,” he says.
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[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.