Infrastructure has emerged as a sought-after asset class- what is referred to in the investment trade as a ‘medium risk’. Conventional investment strategy in super and pension funds has been to allocate a percentage of money to higher risk equities and a portion to bonds.
In more recent years a more sophisticated asset allocation process has emerged and infrastructure sits in that sweet spot. What we are currently witnessing is something of a catchup scramble to get set in large infrastructure.
Some large infrastructure assets are the subject of government regulated pricing so the revenue they generate is known albeit growth is limited.
On the plus side there is a predictability about returns that appeals to super funds, particularly when the low-risk asset class of bonds are yielding very low returns.
But the supply of infrastructure assets is limited. In Australia, a large proportion of the bigger assets, previously held by NSW and Victoria, have now been privatised. Thus, it has become a sellers market.
And those that are held in listed companies, like Sydney Airport, rarely change hands – which is why any weakness in their share prices – as we saw when COVID negatively impacted Sydney Airport – are seized on as an opportunity to pounce.
Large investors with long-term investment horizons have been happy to look through the bumpy revenue period that COVID has caused.
Sydney Airport will ultimately return to full traffic – even if international routes take a few years to fully re-open.
Similarly, Transurban has experienced falls in traffic revenue generated by its portfolio of toll roads thanks to the lockdowns both here and overseas. But it predicts traffic will bounce back when restrictions are eased.
Transurban has made an art of investing in toll roads – due in large part to sophisticated analytics and contact free payment for users. The predictability of revenue on projects not yet open is way more reliable. But for snafus like the $3.3 billion cost blow out in Melbourne’s West Gate Tunnel project, the company has continued its stellar growth trajectory.
The size of the assets being traded in this latest burst of infrastructure deal making reflects the size of the buyers on the hunt.
Superannuation funds in Australia have now become so large and so hungry that only large assets can satisfy them.
While the Queensland government has been a laggard in infrastructure privatisation and a change in policy could unlock some opportunity for would-be investors, there is little in the federal government’s pipeline other than the NBN.
You would have to wonder whether the cash strapped Federal government would consider fast tracking its privatisation.
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