Ken Licence, CEO of Principle Advisory Services, spoke with Infrastructure Investor about Australian superannuation funds’ involvement in direct investing and what lessons the UK pension system can learn from these experiences.
The article examines whether the Canadian and Australian models of direct infrastructure investing are worth replicating. Provided below are some excerpts from the article.
Written by Daniel Kemp & Zak Bentley.
You can read the original article here.
______________________________________
While the UK is pushing for pensions to be modelled more closely on their Canadian and Australian counterparts, the more established direct investors are facing troubles of their own, throwing into question whether the model is worth replicating.
The push to go direct
The largest investors’ desire to go direct is ultimately driven by a belief that it can lead to higher returns.
It is also driven by the belief that internalising investment management will save on external manager fees, resulting in lower costs overall, which is a particular concern to the highly fee-conscious Australian superfunds.
In addition, going direct gives large funds a degree of control over their investments that they might not otherwise get by deploying through pooled funds or even separately managed accounts.
The Australian superfunds were also among the first in the world to deploy capital at scale into unlisted infrastructure, thanks in large part to the GPs that emerged there and which rapidly became the largest players in the sector globally – Macquarie Asset Management and IFM Investors, among several others… A huge programme of privatisations and asset recycling by successive Australian governments also added fuel to the fire.
A former CIO at an Australian superfund, who requested anonymity to speak more freely, said the direct investment model makes sense for a fund when it is deploying capital into relatively low-risk assets in its home jurisdiction, where it truly understands the market and can be on top of risk management more effectively.
But going overseas is “absolutely” more difficult, this person says.
“In Australia, going direct is fine – we can all do old-school infrastructure here, and it becomes a cost-of-capital shoot-out for a lot of assets. But going into new markets – particularly emerging markets, but even in developed economies like the US or the UK – how do you compete with the big managers who have been there for years?
“The UK, US and Europe might be deep markets, but there is also a deep bench of competitors who are very well resourced, have been there a long time and are far better incentivised.”
Managers’ role
Where do managers fit into these funds’ strategies?
Many look to partner with GPs to deploy capital into deals, even if they are not able or willing to make commitments to their pooled funds.
“The key question I always ask is: ‘Can you do a better job than a manager that’s got 50 or 100 people specialising in a particular sector? And can you source better assets?’” asks Ken Licence, CEO of Sydney-based investment consultant Principle Advisory.
“You might have a friendly investment banker who comes to you with a nice asset wrapped up in string, but you could be number 43 on their call list. Are you necessarily getting access to the highest-quality deals? Sourcing is hugely important, so investors have to ask themselves if they can replicate those skills. In some cases, they won’t be able to.”
This is where investors, even the very largest, still look to develop strategic partnerships with GPs – to access deals in markets or sectors where they may not be best placed to do it themselves.
And as Principle Advisory’s Licence says of the Australian superfunds: “They are the new mutuals – they act like big banks in many ways and they’re going to have all the issues associated with those same financial services institutions. So they will have painful investments from time to time – but it’s cyclical.”
It also underscores the fact that while the direct investor model has a lot to offer – ability to put larger licks of capital to work at once, having greater control over investments and saving on external manager fees – it still will not be without challenges, and it certainly won’t be all plain sailing.