Infrastructure will move from the alternative to core asset class for super funds in the next 10 years and will be ideal for post-retirement income products, an infrastructure expert has said.
“Suitably structured infrastructure could be the silver bullet for the longevity ‘crisis’,” CP2 managing director Syd Bone said.
The asset class should be considered as “bonds plus”, rather than “equity minus”, from a risk-return point of view, Bone said.
It would move from around 5 per cent of asset allocations to parity with global allocations of core assets of 15 per cent or more as a third, and more mature, iteration of infrastructure came to market.
As infrastructure moved to 15 per cent of allocations, structuring would be both equity and debt, with debt becoming increasingly inflation linked and longer duration by design.
Such assets were “ideal for matching long-duration liabilities linked to inflation, particularly annuity payments or the income components of post-retirement income products”, Bone said.
Infrastructure as an asset class had a “chequered history”, he said, with the “public-to-private cycles starting in the 1990s, thanks to Victoria’s woes”.
There was then a “false start for the asset class in the mid-2000s”, he said. Infrastructure mark three, after the global financial crisis, was more conservative, with more realistic expectations for returns and sustainable leverage.
Returns would be in the bonds-plus range, not equity minus, Bone said.
“This requires the market to limit leverage of assets,” he said.
“Constrain return expectations and offer assets in unlisted rather than listed form.
“Focus should be on predictable, steady inflation-linked cash flows and asset internal rate of return (IRR) rather than equity IRR. This would happen gradually as supply grew to meet, and then exceed, demand.”
A strict application of a filter distinguishing ‘true’ infrastructure assets was essential to successful investment in this sector, he said.
True infrastructure includes government bonds, toll roads, water plants, energy distribution, communications and airports.
Assets that are not true infrastructure include car parks, satellites, power generation and construction companies.
“Ideally, governments should sell ‘brownfield’ assets to super funds and use the proceeds to finance ‘greenfield’ projects,” Bone said.
He said super funds would need to allocate capital – both equity and debt – in excess of current levels to align with the huge scale of infrastructure needed in Australia.
Research teams would move in-house so funds could access assets directly rather than via pooled funds, and the “role of banks in financing will gradually decline as superannuation funds become increasingly active”, he said.
Acknowledging past mistakes in the first and second iterations of infrastructure financing, he said the public-private partnership model would need to be “revamped to minimise agency conflicts from those with short-term rather than long-term interests in the assets – such as investment banks and construction companies”.
