The infrastructure debate in Australia should be a simple one, says Industry Fund Services chief executive Bill Danaher – but a range of factors tends to get in the way.
Australian governments want to build infrastructure and the private sector wants to invest in it.
However, due to the characteristics of infrastructure investment and a lack of accessible investment vehicles, investing in infrastructure can be difficult.
Traditionally, investment in unlisted infrastructure assets has been the domain of institutional investors, with limited opportunities for retail investors to gain exposure, except through their super fund investment options.
But is there a greater role for retail investors to play in Australian infrastructure funding?
We want to build it
Australia needs new and improved infrastructure given our population and economic growth, higher living standards, and our need to remain competitive in the global economy.
During last year’s G20 Summit in Brisbane, the Australian government focused heavily on infrastructure and growth and agreed to base the new G20 Global Infrastructure Hub – an organisation tasked with kick-starting global infrastructure investment – in Sydney.
At a national level, the current government and the opposition have repeatedly signalled their intent to bridge some of Australia’s estimated $700 billion infrastructure funding shortfall during the next 10 years.
Most of Australia’s states and territories have signalled their intention, in one way or another, to sell or lease existing infrastructure assets to unlock the capital to fund new infrastructure projects.
The Australian government’s Asset Recycling Initiative, which promises to grant 15 per cent of the asset sale price if the proceeds are allocated to new infrastructure investment, adds a further incentive to the states’ plans.
Clearly, Australian governments want to build infrastructure, and they are increasingly looking to the private sector to fund it.
We want to invest in it
Demand for unlisted infrastructure investment is increasing amid growing appreciation of its characteristics, and the benefits of holding it as part of a portfolio.
Apart from being large-scale and tangible, infrastructure assets can also provide a level of certainty of demand because of their necessity – everyone agrees we need airports, roads and electricity generation plants.
Due to the significant barriers to entry and a generally dominant market position (often a monopoly position), unlisted infrastructure assets can experience less volatility than equities and have historically provided long-term, stable and inflation-protected cash flows.
But unlisted infrastructure is not for everyone.
The ‘trade-off’ for the relative stability of returns and lower volatility is that infrastructure requires long-term investment.
Infrastructure is an ‘illiquid’ investment, providing little or no access to the investor’s funds for the duration of the investment period.
As a result, the capital that has been attracted to infrastructure investments is from those who are able to take a long-term view, such as pension funds, insurers, sovereign wealth funds and some global managed funds.
Their need to hold a diverse portfolio and desire to provide long-term, stable returns has meant that infrastructure can be a desirable asset class.
The growing role of the retail investor
But what of the retail investor?
With growing wealth and understanding of the need to develop a diverse investment portfolio, there is growing demand from long-term retail investors for infrastructure investment opportunities.
While many Australians have exposure to unlisted infrastructure assets through their super, are there other ways infrastructure investment can be opened up to retail investors?
This is one question Industry Fund Services (IFS) contemplated as it developed a new type of investment model that gives retail investors exposure to major unlisted infrastructure investment opportunities.
The result is the IFS Infrastructure Investment Model which pools retail investors’ funds and then invests them in the IFM Australian Infrastructure Wholesale Fund (IFM Fund), an open-ended fund available to institutional investors.
The IFM Fund is managed by IFM Investors, one of the world’s largest infrastructure managers.
The IFM Fund invests in well-known infrastructure assets that currently include Melbourne Airport, Brisbane Airport, Port of Brisbane and NSW Ports, amongst others.
It is this exposure that has allowed the IFS Infrastructure Investment Model to set a target benchmark return, after fees, of above 10 per cent per annum over a rolling three-year period.
The IFS Infrastructure Investment Model is available through IFS’s Industry Fund Portfolio Service (IFPS) – an online investment platform that provides access to a range of investment models, term deposits and ASX-listed securities, supported by comprehensive investment reporting.
Investment vehicles like the IFS Infrastructure Investment Model represent part of the changing face of infrastructure investment in Australia and demonstrate how new opportunities are emerging for patient, long-term Australian investors.
Bill Danaher is the chief executive of Industry Fund Services.