Mercer Targets Infrastructure in Growth Map

The merged Mercer Super Trust expects to double its exposure to unlisted infrastructure over the next 12 months, Mark Murray says.

Over the next 12 months, the enlarged Mercer Super Trust – Mercer merged with BT Super in April – expects to double its exposure to unlisted infrastructure. Mercer is seeking to buffer returns against uncertainty in the current economic climate.

Mercer Super Trust and its Australian and New Zealand clients have a collective portfolio of $2.5 billion in private infrastructure assets under Mercer management.

“We expect our portfolio to grow to more than $4 billion, in part as a result of the merger with BT,” says Mark Murray, Mercer Investments’ Head of Infrastructure, Asia-Pacific. “We now have a bigger pool of capital available to invest in unlisted infrastructure assets.”

The merger creates a $63 billion super fund, catapulting Mercer Super Trust into the top 15 largest super funds in Australia and presenting a challenge to deploy more money into an increasingly difficult investment market.

In this climate, says Murray, unlisted infrastructure stands out as an alternative on “a couple of points”.

Murray told [i3] Insights: “Firstly, many underlying assets are protected against inflation because of degrees of regulation. Long-dated contracted assets also have inflation escalation built into their terms. Other assets have pricing power allowing them to pass on higher costs simply because of their essential nature.

The strategy is one of defence.

“In selecting our assets, we look for those that can perform through recessions and in difficult circumstances, such as customer termination of contracts,” Murray says.

“But there isn’t the upside in such assets that there is, for example, in venture capital, so we need to protect against downside. There isn’t the scope for the losses that investors might be comfortable with in venture capital. Each of the investments we have made, we think are attractive on their own merits as well as contributing to a defensive portfolio.”

The Role of Infrastructure in the Portfolio

Mercer, which has invested in unlisted infrastructure since 2005, has found over the decades that its unlisted infrastructure portfolio has stood the test of time in terms of both valuation and the delivery of attractive returns.

Unlisted infrastructure makes an important contribution to the overall performance of Mercer’s balanced funds, says Murray.

The overarching investment principle is diversification, including, in terms of geographies and asset types, de-risking of the Mercer portfolio, which is invested very broadly across developed markets – with around 20 per cent in Australia and New Zealand and the balance mostly in Europe and the United States.

Murray says the portfolio is highly diversified in terms of sub-sectors, with around 25 per cent invested in communications, such as telecoms towers, data centres and fibre networks. There are similarly large allocations to transportation – such as airports, seaports, and toll roads – and renewables, with the balance in a wide range of assets including social infrastructure (such as hospitals, schools, and waste management), regulated utilities and other assets that are contributing to the energy transition.

Some 60 per cent of all investment is with comingled funds, managed by established asset managers. The balance is invested through separate accounts and individual co-investments with select managers that have provided Mercer with discretion over individual asset exposures and provided more control over deployment pace.

Mercer began advising clients on infrastructure investing in the 1990s at around the time when important public assets in Australia, such as airports and regulated utilities, were becoming privatised. Australia was an early mover in this regard, and Mercer’s Australian team has in the years since played a key role in getting the firm’s clients set in unlisted infrastructure investment, which totals around US$11 billion globally.

“Our unlisted infrastructure investment is the single most substantial within the global Mercer group,” says Murray. “Our portfolio has been greatly enhanced by our global presence. We have four offices that focus on unlisted infrastructure – in Sydney, Toronto, London, and Zurich. This presence gives us the ability to establish much broader relationships with managers to access opportunities in the global market.”

Mercer’s portfolio includes exposure to early-generation assets, including several airports – such as Adelaide, Brisbane, Perth, Melbourne and Sydney – through IFM’s Australian Infrastructure Fund, along with regulated assets (electricity, gas and water). Murray says airports are less-regulated but nonetheless important infrastructure. “Airports have been challenged recently. (However) our exposure is modest – between 5 – 10 per cent of our portfolio.”

In terms of regulated utilities, Mercer has an exposure to First Gas, one of the largest networks for high-pressure gas transmission and gas and electricity distribution on New Zealand’s North Island.

Murray says Mercer also had an exposure to Britain’s Anglian Water Group but exited in part because there was no opportunity to increase the holding. It had been a good investment, Murray says. “We continue to be interested in water, and we’re currently looking at a UK water opportunity.”

Energy Transition

In the 12 months before the merger with BT, Mercer invested around $800 million in new assets. More of its recent investments have gone, predictably, into new assets that seek to capture the transition from fossil fuels to renewables.

“It is helpful to break it down,” Murray explains regarding the broad energy transition theme. “We first ask how we can best generate energy? How do we then store that energy and how do we transmit and distribute it? We also ask how users can adapt to use energy more efficiently.

“Most of our investment in the energy-transition theme is in energy generation assets and in improving user efficiency, such as via smart metering.”

A major new commitment is a co-investment in a French-headquartered company, GreenYellow, which has a global presence in markets as diverse as Vietnam, Madagascar and Colombia.

Murray says GreenYellow has “a foot in both camps” in terms of generation and efficiency. “It is in the business of generating solar energy, with over 500 MW capacity, and it is also in the business of saving user energy costs.”

Mercer, an existing investor in infrastructure funds managed by Ardian, based in Paris, became a co-investor with Ardian when it bought into GreenYellow in July 2022 in a transaction that valued the French company at around €1.4 billion ($2.3bn).

Ardian acquired a combined 75 per cent stake held by Groupe Casino, Bpifrance and Tikehau.

Another of Mercer’s largest exposures is to Finerge, Portugal’s second-largest renewable energy producer, which operates 69 wind farms and 17 photovoltaic solar plants across Portugal, and is expanding into Spain. “We co-invested into Finerge in 2015 alongside Igneo funds, in which we are also invested,” says Murray.

Another slightly smaller recent investment is in the Netherlands-based Fudura, which designs, implements, manages and maintains sustainable energy infrastructure. Mercer is a co-investor alongside a Dutch manager, DIF Capital Partners, and pension fund PGGM, which bought the business.

In the US, Mercer has a holding in the renewables and power platform Terra-Gen, which develops, constructs and operates utility-scale wind, solar, energy storage and geothermal electric generation facilities throughout the US from its base in California. Mercer made its commitment to Terra-Gen in 2021.

“We acquired our stake through Energy Capital Partners,” says Murray. “Mercer globally was already an investor with the manager.” The US private equity group Energy Capital Partners has been an investor in Terra-Gen since 2015 and, in 2021, brought in new sources of capital.

Murray tells [i3] Insights: “We bought into Terra-Gen before the Biden Administration introduced its Inflation Reduction Act to encourage investment in renewable energy and to reduce emissions. This legislation is net positive for our investment. It will encourage more investment in renewables and offers a strong basis for Terra-Gen to grow its business and to develop its pipeline of projects.”

With the transition to 5G, Murray says there is increasing focus on digital infrastructure and telecommunications. Another of Mercer’s more significant recent investments was through Macquarie, which jointly acquired the Sydney-based telecommunications group, Vocus, along with Aware Super in a $3.5 billion scheme of arrangement in 2021.

“We are looking at a communications asset in Europe. We hope to close the transaction in the middle of the year, but there is much more detail we have to work through,” says Murray. He and his team continue to look for fresh opportunities in both Australia and the global market.

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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.