Analysis

ROUNDTABLE

SPONSORS ANZ • PACIFIC EQUITY PARTNERS

From crisis to growth

With an economy that’s fast recovering, thanks to the government’s effective response to the pandemic, infrastructure investors are gearing for growth in Australia, with opportunities abounding in several sub-sectors, Daniel Kemp finds

f all the countries have experienced terrible hardship. For affected by the investors it means the country’s econ- coronavirus pan- omy has already snapped back into demic, Australia’s something like normal – and the partic- experience has been ipants in our 2021 Australia roundtable relatively serene. are all eyeing growth again. OThere were the initial lockdowns across the country, which quickly lift- Speedy recovery ed. These were followed by sporad- “The pace of the reversion from that ic snap lockdowns in different state ‘triage’ stage in March and April 2020 capitals at different times, including to recovery, even to growth now, has for an extended period in Melbourne, been eye-catching,” says Robin Dutta, the capital of the south-eastern state head of infrastructure at ANZ. “The of Victoria. International borders re- consensus view is that the underlying main stubbornly closed to all but a A$3.5bn health practices here have been pret- small number of returning citizens and Value of Vocus take-private deal ty good compared with the rest of the wealthy international celebrities. world, and we shouldn’t overlook the However, at the time of writing sheer scale of the stimulus measures, the country has only suffered around which exceeds anything we saw in the 30,000 covid-19 cases and 900 deaths, global financial crisis. the vast majority of which have oc- “Both the public and financial sec- curred in Victoria. It has been a re- A$360m tors have learned a lot from past cri- markable public health achievement PEP’s final close on its Secure Assets ses in terms of managing the balance when so many other developed nations Fund in June 2020 of regulatory considerations with the

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Robin Dutta

Head of infrastructure and PPP, corporate finance, ANZ

Dutta runs the infrastructure and PPP team within ANZ’s corporate finance division. His role focuses on M&A/PPP financings across transport, social and digital infrastructure, with emphasis around the transition to a low-carbon economy. He was previously head of loan syndications for Australia at ANZ, which he joined in 2009. Prior to that, he spent 11 years at Citi with roles in Sydney and New York.

Andrew Charlier

Managing director, Pacific Equity Partners

Charlier joined PEP in 2007, having previously been a consultant with Bain & Company in the UK, Australia and New Zealand, specialising in utilities. He received an MBA from INSEAD and has a bachelor of engineering degree from the University of New South Wales.

Mark Hector

Senior portfolio manager, infrastructure and real assets, Aware Super

Hector is senior portfolio manager of infrastructure and real assets at Aware Super, the second largest superfund in Australia with A$140 billion of assets under management. Around A$9 billion of this is invested in infrastructure and real assets, which Hector has overseen since joining First State Super in May 2014. First State Super rebranded as Aware Super in mid-2020 following a series of mergers. Prior to this, Hector held project finance roles with Japanese bank MUFG, Leighton Contractors (now CIMIC), Babcock & Brown and ABN AMRO (now RBS).

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need to support borrowers and the “LPs, given that they thought they’d money into more pooled funds,” says broader economy. have a rush on withdrawals and that Hector. “Our mandate and overall fund “This has all played a part in posi- they might encounter the denomina- objectives have evolved over the last tioning the market for some exciting tor effect, stopped all new commit- year or so, to a point where almost all opportunities ahead. And infrastruc- ments. We just cut our fundraising at our incremental capital needs to be de- ture stands to benefit as much as other the amount committed and went with ployed on a pure direct basis or through areas of the economy, if not more.” that,” Charlier says. meaningful fee-free co-investments and Mark Hector, senior portfolio man- “For a good three to six months no partnerships where we can add value as ager, infrastructure and real assets at new funds were effectively raised. That a larger, trusted, reliable, sophisticated Aware Super, says infrastructure has is changing – we’re seeing fundraising investor.” proved to be “highly resilient”. come back and good money flow into This will not preclude the super- After swiftly writing down some as- funds, but almost all of it has flowed fund from working with external man- set values at the start of the pandem- to existing GPs. If you’re a new GP or agers forever, though this is not on the ic, the A$200 billion ($153 billion; have a new strategy, it’s a challenging agenda for now. €129 billion) superannuation fund market.” “We’ve done plenty of research talk- changed course mid-year. “At our Hector says Aware Super’s strategy ing to other global pension fund direct June 2020 end-of-year valuations we has evolved over the past 12 months, investors over the last several years, and were already writing back some of the partly as a function of the changed pan- every single major player still has mean- asset revaluations,” he says. “We real- demic world and partly because of the ingful external relationships, so that will ised that, certainly in Australia anyway, fund’s increased size. The Aware Su- be critical in our future deployment, things weren’t going to pan out nearly per brand was born last year from the too,” Hector says. “But we’re seeking as badly as we first thought.” merger of First State Super, VicSuper and WA Super to create Australia’s sec- Return to growth ond-largest superfund. The new normal has seen investors “We’re not really focused on sup- do things slightly differently. Andrew porting new managers or putting Charlier, a managing director at Pacific Equity Partners, explains that his firm is now having much more regular for- mal contact with the LPs in its funds. “We have a large series of superfund investors in our portfolio, who wanted “Take-private deals are week-by-week or monthly valuations, partly because of the pressures they had over early access to super,” he says, inherently uncertain referring to the federal government’s Covid-19 Superannuation Early Re- lease Scheme. “There was a big push and they have a lot to keep investors updated on where the portfolio might have impacts. “Those conversations gradually more complexity, so changed over the past year, to the point now where it’s about growth, including asking what deals are coming up and wanting to deploy more capital. But they’re not for the there’s still a lot more communication going on with our LPs than there was pre-pandemic.” faint-hearted” The health crisis also affected fund- raising. PEP held a final close on its ANDREW CHARLIER Pacific Equity Partners Secure Assets Fund in June 2020 on A$360 million, a change to initial plans to keep fundraising for a while longer.

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“The pace of the reversion from that ‘triage’ stage in March and April 2020 to recovery, even to growth now, has been eye-catching”

ROBIN DUTTA ANZ

scale benefits and value for money for “The amount of financing volume we says. “But what’s changed is that, as lit- our members. That means we need to transacted in that early period in 2020 tle as five years ago, there was still some reduce that fee load and naturally in- was equivalent to a normal year of busi- variability in views about digital and as crease the level of internalisation.” ness,” he says. “But by year-end, a lot to whether it was strictly within man- The fund naturally turned inwards of that activity had unwound. Facilities date for certain infrastructure funds. last year and focused on its Australian were repaid or cancelled as the broad- “Now, no infrastructure fund can portfolios. This was largely because of er market got a clearer outlook about ignore the space. The pandemic has the practicalities of doing due diligence what’s in front of it.” reinforced the wider investment the- on overseas investments when travel This, in turn, led to far fewer dis- sis, thanks to increased working from had been prohibited. tressed opportunities materialising home, e-commerce and even things “Our natural competitive advantage than expected, Charlier says. “We saw like e-health.” is here in Australia,” Hector says. “We so much liquidity come through, with Charlier says an “incredible wave” have people on the ground, we under- great support from both the govern- of demand for digital services is back- stand the market and the players, we ment and the banking sector, that busi- ing this up, but cautions that some in- are a trusted local owner of sensitive nesses you would expect to run into vestors might become exposed to high- assets, and we’ve got tax advantages. trouble, like airports, didn’t really. er levels of risk than they anticipate. “But as the superannuation sector “I still think that’s building, as there “We’re seeing the risk profile of continues to grow, we need to continue are distressed situations that we know of some of these deals increase, particu- investing offshore, and to do that cost that are coming, but we saw much fewer larly as people race to build capacity, effectively for unlisted investments in opportunistic deals than I expected.” as you have to take risk on offtake over particular in future, we are investigat- time,” he says. “There is a great macro ing the potential to open some selective ‘Incredible’ digital demand trend sitting behind that, but there is offices overseas.” Dutta says technology and digital in- real operational risk in these assets.” The recovery in Australia has been fra have been an “obvious” bright spot Aware Super made two big moves in “broad”, Dutta says. Liquidity con- over the past year, and continue to be digital infrastructure over the past 12 cerns abated quite quickly and con- so in terms of the health of the pipeline. months. First, it tried to buy Australian straints around capital have also eased, “Last year wasn’t the first time we saw Securities Exchange-listed fibre pro- especially since the beginning of 2021. investment in digital infrastructure,” he vider OptiComm in October, the first

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time an Australian superfund had tried by itself to purchase an ASX-listed company in its entirety. Aware Super ultimately lost out in a public bidding war to incumbent fibre company Uniti. It then teamed up successfully with Macquarie Infrastructure and “In today’s world awash Real Assets to acquire Vocus, anoth- er ASX-listed fibre business with an extensive network in Australia and with plenty of capital, New Zealand. That deal was worth A$3.5 billion. “Data is now well known as the new interloper risk is also oil,” Hector says. “The data/tech sec- tor was already getting quite a bit of interest before covid, in terms of asset always there” classes like mobile towers, data centres,

fibre. There’s a lot of capex that still MARK HECTOR needs to happen in the Australian mar- Aware Super ketplace, as well as globally. “We’ve been pleased to get involved there with the Vocus transaction and are looking forward to doing more data-related deals in the years ahead in what looks likely to be a growing trend: Australia and globally.” more take-private deals. Aware Super ended up walking “Take-private deals are inherent- away from its attempted takeover of ly uncertain and they have a lot more OptiComm after it turned into a public complexity, so they’re not for the auction, with the price edging upwards. faint-hearted,” Charlier says. “How- “We’re proud of that process as it was ever, they have been a good hunting the first time an Australian super fund ground for us, and we did two last in, and the way you make approaches. had tried to buy all of an ASX-listed year.” PEP told Infrastructure Investor In today’s world awash with plenty of company on its own and we had con- in April that these types of deals ac- capital, interloper risk is also always viction that the original Uniti offer was count for around a third of its activity. there.” materially undervaluing the company “Given the amount of private capital and was worth competing for,” Hector that’s being raised, we see a lot of play- Economics driving renewables says. “We moved heaven and earth to ers looking at that market and I expect Renewable energy and other energy in- do a lot of due diligence on that asset we’ll see more of these deals going for- vestment opportunities were also cited class and OptiComm in a relatively ward,” says Charlier. by all three panellists as a growth area, short space of time. Hector echoes this and makes a sa- despite years of policy uncertainty in “We think that space in Australia was lient point about the risks that super- Australia. not particularly well understood by in- funds might expose themselves to when “Interest rates are so low that it frastructure investors – and that knowl- trying to take companies private. means it’s very economic to replace edge of the fibre space helped us move “The potential reputational risks, opex with capex,” Charlier says. “So, reasonably quickly on the subsequent especially for an investor like ourselves, the returns people are seeking to get Vocus deal alongside MIRA, where we are more heightened than in private when bidding into renewables are sub- have successfully recently signed up to a market deals, as these deals play out in stantially lower, which means the op- scheme implementation deed.” the public domain,” he says. “We cer- portunity for displacement of thermal Aware Super’s experiences bidding tainly pride ourselves as an organisa- generation is increasing. for ASX-listed companies – it also re- tion in wanting to act [in] an appropri- “We see economics as the big trend cently supported the QIC-led buyout ate way with the right spirit, so you do driving increased renewables deploy- of dual-listed Tilt Renewables as a need to be more careful and selective ment – it’s not government policy driv- substantial co-investor – is evidence of in the types of deals you get involved ing the uptake.”

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renewable energy, where else do inves- tors see opportunities? “I’d highlight healthcare, and I don’t mean build- Up Down Under: Australia’s effective ing hospitals under the PPP mod- covid strategy el,” Dutta says. “We’re seeing a log- has enabled its economy to ical expansion of some infrastructure rebound fund mandates into more operating businesses. The pipeline around social and affordable housing also seems to be on the increase.” Charlier echoes Dutta’s optimism on both sets of opportunities, and adds the electrification of transport as an area to watch. “People are looking at the design of future infrastructure in a different way than they were pre-pandemic,” Charlier says. “The electrification of the transport fleet is coming, for ex- ample, and the way that is playing out is creating a series of interesting in- vestment opportunities, whether that is in last-mile embedded networks, PEP owns Zenith Energy, a remote acquisition of Tilt Renewables. Hector the public transport fleet, or things energy business that operates island believes diversification is more impor- like garbage trucks. There’s an inter- power stations off the main electricity tant in renewables than in any other in- esting reconfiguration of how we do grid. Charlier says that business will frastructure sub-sector because of the non-aviation transport that is coming.” be rolling out more subsidy-free re- problems that can arise unexpectedly ANZ, Aware Super and PEP are newable generation purely because it is with individual assets. This has been a all gearing up for this new growth cheaper than the alternatives. problem for many investors in Australia phase after what has been a turbulent “You could argue that the lack of in recent years owing to changing trans- year – even in Australia, where the re- policy alignment hasn’t held back in- mission loss factors. covery has been quicker than in most vestment in renewable generation “I think regulators have received the other nations. Infrastructure there has when you add up the numbers,” Dutta message loud and clear that they need proven resilient through the crisis, says. “But I think getting that align- to be more careful around allowing ad- though airports are cited as the main ment is more important now to unlock ditional renewable developers to hook sub-sector to face material uncertainty. the further investment we’re going to into unstable parts of the grid,” he says. The year has been a challenging need to complete the energy transition. “And investors are naturally more care- one, of course, but sentiment is posi- “Among the investors we talk to, ful making allowances for ongoing grid tive and fundraising and deal activity over the last 12-18 months there’s been connection and instability issues, be- are both on the rise again. a desire to gain a foothold in renewa- yond the typical due diligence around As Charlier puts it, investors relived ble generation assets, often through a aspects such as the strength of genera- the five years of post-GFC experience platform investment. Given the con- tion.” within a 12-month period. “The crisis solidation phase that the market has hit, then we had the drive for liquidity entered over this period, those Tilt Interesting future before the recovery started to materi- Renewables-style opportunities are Although concerns over grid con- alise, and now we’re seeing growth on becoming more prevalent, even if they straints have not gone away, Dutta be- the other side,” he says. aren’t always at that scale. That will lieves that things might improve: “The “In the last 12 months we did four continue to be an opportunity for insti- pipeline of transmission projects has deals, two on the buyout side and two tutional capital.” picked up pace, a tacit recognition of on the infrastructure side, which for us Aware Super is one of those in- the grid issues that have permeated the was actually a pretty normal year – even vestors that has made a platform in- market over the last few years.” though it was the most abnormal year vestment, with its support for the Beyond digital infrastructure and anyone’s ever experienced.” n

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