Infrastructure: an asset class for today’s needs

To borrow from Ernest Hemingway when he described a character’s misfortune as occurring “gradually, then suddenly,” the current climate for infrastructure investing has similarly seen a slow buildup of nice-to-haves rapidly evolve into a series of non-negotiables.

Themes like climate change, the energy transition, technological change, and resilience to economic cycles were once considered useful and interesting and are now correctly recognized as fundamental drivers of investment outcomes. In this environment, the role of long-term investors, how they navigate and take advantage of these themes to continue delivering returns, becomes more important.

As a pioneer of open-ended funds and infrastructure investment, taking a long-term approach is core to IFM Investors’ ethos. When we invest, we think in decades, not years. We were created by Australian superannuation funds to meet their long-term investment needs, with a clear purpose: to invest, protect and grow the retirement savings of the millions of working people they represent.

By investing in infrastructure for the long-term on behalf of like-minded investors, we’re giving their members — the nurses, teachers, construction, and hospitality workers — the opportunity to invest as though they are millionaires and billionaires.

In doing so, we take an unflinching, prudent, and long-term view of investment portfolios in the pursuit of maximizing their retirement savings, so they can look forward to a retirement where presents for the grandkids, dining out and holidays are not unreachable.

Question 1: Australia is seen as a leading infrastructure investor. What has driven investment in this area?

Australia’s reputation as a leading infrastructure investor can be attributed to several key factors that have driven investment in this sector. These factors include:

• Major economic reforms: through the 1980s-1990s under the Hawke-Keating Labor governments there was a focus on increasing efficiency in government. This led to the privatization of large federal and state government-owned assets across multiple sub-sectors, including banks, airlines, airports, telecommunications, and power utilities.
• Multi-decade economic growth: Australia has experienced more than two decades of strong and resilient economic growth and its recent economic strength has been supported by its proximity to Asia Pacific markets, particularly in China. Along with economic growth, the country’s growing population and urbanization has created significant demand for various infrastructure projects.
• Stable political and regulatory environment: Australia’s economic fundamentals, stable political and legal system and positive policy settings have made it an attractive destination for both investors.
• Accommodating foreign investment regime: Australia operates a foreign investment regime which is open, transparent, and welcoming of inbound investment.
• A progressive public/private partnership model: To finance and develop projects, Australian governments (both state and federal) have partnered effectively with the private sector, including industry superannuation funds. This approach allowed for risk sharing, leveraging the private sector’s expertise, and has attracted significant investment into infrastructure. Australian governments have actively encouraged infrastructure investment through policy measures, incentives, and commitments to develop critical infrastructure.
• Robust secondary market and development of infrastructure as an asset class: Australia has also developed a robust secondary infrastructure market, primarily driven by the public-to-private sale of infrastructure by federal and state governments looking to rationalize government balance sheets and improve efficiency of service delivery. The Australian financial sector (with early entrants in this market, such as IFM) has successfully developed a deep set of expertise in owning and investing in infrastructure assets. This led to the establishment of infrastructure as an asset class.
• The impact of the domestic superannuation sector: It’s important to consider the significant role that the Australian industry superannuation funds play in driving infrastructure investment in the country. Their size, stability, and commitment to achieving stable long-term returns position them as substantial investors in the infrastructure investment landscape. These funds not only provide a stable capital source but also contribute to developing and maintaining critical infrastructure assets, benefiting both the funds' members and the broader Australian economy. It also plays a key role in the industry super funds surpassing the performance of their domestic peers.

Question 2: Tell us about IFM and how you have grown. What has been the secret of your success?

IFM Investors is a global investment manager owned by Australian superannuation funds, with a history dating back over 30 years. In 1990, a group of Australian funds came together to develop what was then called “Development Fund Australia.” Their goal was to invest in infrastructure and other growing companies in Australia, pooling resources to make long-term investments.

The aim was to give their members — the nurses, the teachers, the construction, and hospitality workers — the opportunity to invest as if they were millionaires or billionaires. This ownership and sense of purpose has set IFM apart and has been key to our success.

This is so important because it means the value proposition to our owners goes beyond generating a stream of dividends.. Instead, the focus is on delivering exceptional long-term investment outcomes for them. This simple alignment equation ensures our daily business operations are geared toward managing all aspects to achieve excellent long-term outcomes. Most importantly, we pursue these excellent long-term outcomes with the culture, values, sense of purpose and responsibility expected of a business founded and owned by long term investors.

Across our team, we talk about how important it is for us all to come to work every day remembering that it’s not our money we manage; it’s often the money of an individual worker saving for a particular purpose, such as a dignified retirement. Reflecting on these principles, IFM Investors today has grown significantly, managing A$215 billion in funds as of 30 June 2023, on behalf of 626 like-minded institutions worldwide.

We invest across four asset classes, including infrastructure, debt investments, private equity, and listed equities. Proudly, we stand as one of the largest listed equity shops in Australia. We have also grown to become one of the largest infrastructure managers in the world, with well-established portfolios across both infrastructure equity and debt that span core infrastructure, such as airports, seaports, utilities, toll roads, renewable energy, and digital technology.

We continue to grow and are evolving from an Australian business with global ambitions to a global business with a proud Australian heritage. When you're investing and owning complex assets for the long term, local presence becomes incredibly important. Therefore, we have 12 offices around the world, with a large presence in London and New York. Our footprint extends to major Asian cities, such as Seoul, Tokyo and Hong Kong. The intensity of our effort working with the management teams on our assets is important not only for existing assets but for originating new investments.

Question 3: When you consider assets and markets to invest in – what considerations do you make?

Our investment strategy centers on building robust portfolios that will deliver long-term returns to our investors. This involves identifying and acquiring core infrastructure assets, distinguished by their strong market positions and high barriers to entry. We seek assets with long concession life, inherent inflation protection, the ability to benefit from economic growth, and a history of stable and predictable revenues. We also focus on investing in countries with established regulatory environments and strong rule-of-law. Before any new country entry, we undertake extensive risk analysis and implement continuous monitoring programs for ongoing assessment of country risk.

Our strategy also closely aligns with the open-ended structure of our funds, and we actively seek opportunities to establish platforms that enable us to unlock synergies and pursue value-accretive bolt-on acquisitions. This approach, characterized by a focus on long-term value creation without imposing artificial exit timeframes, allows us to capitalize on strategic opportunities, ultimately enhancing the overall performance of our assets.

We also use a proprietary risk management and portfolio construction framework called InFRAME^TM to guide the decision-making process in constructing a balanced core infrastructure portfolio. InFRAME^TM analyses the underlying revenue streams that drive the performance of portfolio assets. It enables us to gain a deeper understanding of the revenue drivers and risks that the assets are exposed to and build quantitative insights into the way assets and sub-sectors respond to macro-economic drivers and scenarios.

Question 4: How do you think investment managers can help with global energy transition?

When examining the world's current and most influential secular trends, it becomes clear that the energy transition is a focal point requiring our attention and proactive execution. We do this with a clear-eyed focus on achieving strong risk-adjusted returns for our clients and their millions of beneficiaries.

While energy security has posed a short-term challenge in recent years, it has also crystalized longer-term, systematic risks and an understanding that healthy long-term investment returns are dependent on healthy environmental and social systems, now and in the future.

In other words, the quality of investment returns in ten-and-twenty years’ time, depends on the quality of the system in ten-and-twenty years’ time. It is in this context that we need to consider the role of institutional investors and how they can collaborate to address systemic risks and the global transition to clean energy.

This means that alongside individual investments in the energy transition, long-term investors, such as pension funds should also address challenges at the systemic level. At the asset or investment manager level, investment managers can take two approaches. The first one involves taking and transitioning old assets. At IFM, we explore every way to reduce emissions from our existing assets, committing capital and supporting their reduction strategies.

Alongside investing in existing assets, we need to build the infrastructure essential for a net-zero world. This involves investing in renewable generation and updating the grid needs to accommodate the electrification of everything. It also includes thinking about the infrastructure that supports new fuels like hydrogen, biofuels and the necessities for carbon capture.

This presents significant opportunities in both infrastructure equity and debt. For example, we anticipate attractive relative value opportunities in sub-investment grade infrastructure debt. This includes originating opportunities in a broad range of sectors, such as the energy transition, the electrification of transport, energy efficiency and environmental management. At a system-wide level, governments and pension capital need to continue driving collaboration and taking a system wide approach to help deliver on the energy transition.