australian infrastructure funds research paper

8/9/2019 Australian Infrastructure Funds Research Paper

1/24

IBUS6015: INNOVATION AND ENTERPRISE: SPECIAL PROJECT

RESEARCH PAPER

Infrastructure funds and the

macroeconomic drivers ofentrepreneurial assetpackaging:

the Australian experience

Matthew Bright

Presented to the Faculty of Economics and Business

in partial fulfilment for the requirements of aMaster of Commerce degree by coursework

The University of Sydney

Sydney, AustraliaJanuary 2008


2/24


3/24

3

Introduction

Infrastructure funds are today a prominent part of an emerging asset class in global financial

markets in both established and emerging economies. In the fifteen months to July 2007, seventy

two new infrastructure funds raised US$120 billion of capital commitments globally (Orr, 2007).

These funds operate on sector-specific or diversified investment mandates and are managed by

asset managers, private equity fund managers or large investment banks undertaking proprietary

investments through dedicated business units.

Such fund raisings are indicative of financiers desire to invest in the infrastructure space, where

there was earlier estimated to be an $8.5 trillion backlog of infrastructure worldwide to be

delivered by 2010 (Faye and Tito, 2003) and a $1.6 trillion backlog in the United States alone

(Orr, 2006 and RREEF, 2006), with extensive opportunities for private sector participation.

World Bank estimates have previously valued the worlds infrastructure stock at US$17 trillion

(UBS, 2006), including listed, unlisted, private and state-owned assets.

In order to understand the fund raisings and transactional activities of infrastructure funds in the

current investment climate, it is pertinent to examine the origin of the infrastructure fund model,

the macroeconomic and supply/demand factors which spawned its inception in Australia in the

1990s where the first infrastructure fund was conceived, developed and exploited. Australia is

one of the most mature markets for infrastructure in the world, with the asset privatisations

which took place in the 1990s having spawned an enduring investment phenomenon.

This paper analyses the macroeconomic factors which enabled the entrepreneurial proprietary

innovation by listed infrastructure funds (and their parent companies) between December 1996

and December 2006 by the managers of two of the seven pioneering funds identified by the

Collaboratory for Research on Global Projects, Stanford University (Orr, 2007), including


4/24

4

Macquarie Bank Limiteds Infrastructure and Specialist Funds (ISF) business unit (a first

mover); and Babcock and Brown Limited, an asset manager (a fast follower). These investment

firms are the two dominant, domestically-headquartered, globally-active players in the

infrastructure funds business which undertake proprietary investments in infrastructure assets

and securitise these assets through their infrastructure fund vehicles.

Existing academic literature on infrastructure funds centres on issues such as the significance of

infrastructure in investment portfolios (Peng and Newell, 2007); and the political economy

considerations associated with privatisation, public private partnerships (PPPs) and securitisation

(Jeferris and Stillwell, 2007); whilst extended media coverage has dwelled on controversial

microeconomic considerations associated with infrastructure funds such as fair value accounting

methodology, fee structures, capital structure, sustainability (Chancellor 2007, Haigh, 2007 and

Maclean, 2007). Analysis has thus far neglected to examine the macroeconomic climate which

facilitated the entrepreneurial opportunity to capitalise on the transition from public assets to

private ownership and transferral to shareholder ownership.

In 1996, a triad of macroeconomic trends including low inflation, constant bond yields and

upward domestic equity markets momentum, coupled with the Australian Governments policy

revision towards infrastructure ownership and development facilitated Schumpeterian creative

destruction by Australian investment banks and spawned the birth of infrastructure as a discrete,

alternative asset class.

Analysis in this paper is directed towards how macroeconomic phenomena impacted the original

inception and subsequent performance of infrastructure funds from December 1996 to December

2006 in Australia, one of the most mature infrastructure markets in the world. A typical

invention/innovation/diffusion process occurs in this period, where the innovating operator of


5/24

5

infrastructure funds, Macquarie Bank, conceives and exploits the infrastructure fund model,

commencing with Macquarie Infrastructure Group in 1996, and achieves temporary market

power until Babcock and Brown copies and enters the market for listed infrastructure funds in

2004.

The paper begins with a description of the methodology used in research. The early sections of

the paper consider infrastructure as an asset class, the investment opportunity and the Australian

experience. The body of the paper considers the macroeconomics of infrastructure in Australia

and corporate entrepreneurs decisions in this climate. An appendix offers a broad business

overview of the asset packaging business.

Methodology

Analysis is conducted in two parts. Firstly, qualitative analysis examines the characteristics of

the infrastructure asset class (with a brief explanation of the asset business also included at

Appendix A). Second, quantitative analysis surveys the macroeconomic climate and how

individual variables collectively influence the inception of infrastructure funds and corporate

activity and affect their performance over a ten-year period. Primary analysis centres on the

period of December 1996 to December 2006, with secondary analysis examining

macroeconomic trends for the immediate earlier corresponding period prior to the inception of

the first infrastructure fund.

Quantitative research is orientated towards the analysis of the interaction between

macroeconomic variables including Australian Government 10 year bond yields, inflation,

interest rates, equity market movements, with company decisions including listed infrastructure

fund capital raisings and stock market listings and corporate activity by these funds and their

parent companies.


6/24

6

Observing the interaction of macroeconomic variables with corporate decisions in the period of

infrastructure fund innovation (and relative to the prior corresponding period) gives an insight

into the decision-making of entrepreneurs in a sequential multi-period setting. It is important to

examine the initial macroeconomic setting which facilitated the entrepreneurial opportunity, its

growth prospects and subsequent innovations.

Australia is selected as the case study as it is the market where the innovation occurred, now one

of the most mature markets for infrastructure investment in the world (alongside Canada and the

United Kingdom) and the global headquarters for the two most prominent investment firms

active in global infrastructure investment, Macquarie Bank and Babcock and Brown Limited.

The business environment has undergone significant changes since infrastructure privatisation in

the 1990s with the inception and operation of multiple infrastructure funds.

1. InfrastructureThe infrastructure fund

The infrastructure fund was a new-to-the-world product, an invention that created an entirely

new market of primary demand, leveraging firm strengths into a new activity centre in a

greenfields market. Typically, in greenfields market identification, firms look for emerging

trends and develop a fringe market through product and process innovation to orientate the

product to markets with the goal of market dominance and the objective of market leadership at

product inception. The innovator undertakes a first-to-market strategy of leveraged creativity -

using the firms existing strengths and brainstorming creative applications to arrive at new

products. Future products which are developed are adaptive products the firm takes its own

product and improves it in some way, with declining cumulative expenditures curve in product

development.


7/24

7

The asset class

Infrastructure is the fixed wealth of nations (Orr 2005). Infrastructure assets are the physical

structures and networks which provide the essential services required by societies and economies

to function. Infrastructure is divisible into two categories: economic and social infrastructure.

The unique attributes of various industry segments vary by their asset cash flow structures and

life cycles. Economic infrastructure includes user-pays services in sectors such as transport (toll

roads, bridges, tunnels, sea ports, airports, rail and ferries), energy and utilities (gas distribution

and storage, electricity distribution and generation, waste collection and processing, water

treatment and distribution, renewable energy), communications (satellite systems and cable

networks) and specialty sectors (car parks and storage facilities) (CFS 2006, RREEF 2005,

RREEF2006). It is estimated that 70% of Australias infrastructure is economic infrastructure

and 30% is social infrastructure (Senate). Social infrastructure includes state-pays services in

sectors such as healthcare (hospitals, aged care), education (schools), housing (affordable

housing) and judicial and correctional facilities (courts and prisons). Transactional activity in

economic infrastructure may occur by way of acquisition, trade sale, privatisation, development

and construction or joint venture. Transactional activity in social infrastructure generally occurs

through public private partnerships as Governments opt to retain control of core clinical and

social services in line with public policy (CFS 2006, RREEF 2005, RREEF2006).

The investment opportunity

In broad economic terms, infrastructure assets exhibit low volatility; possess cyclical immunity;

and hold monopoly, duopoly or oligopoly positions with sufficiently prohibitive barriers to entry,

inelastic demand and non-rivalrous characteristics (Orr 2005, Peng 2007, RREEF 2007, CFS

2006). Attractive considerations include counter-cyclical demand strength and population


8/24

8

growth; captive customer bases; stable, predictable inflation-linked revenue streams with growth;

low operating risk and require low capital expenditure; low correlation of returns with other asset

classes; and investment lifecycles compatible with pension funds seeking long-term investments

to match their long duration liabilities. (Orr 2005, Peng 2007, RREEF 2007, CFS 2006).

Infrastructure investors seek stable earnings from essential goods and services, portfolio

diversification, investment in an asset class with low correlation to price fluctuations in other

asset classes and a tax effective income stream with tax deferred components (ASX 2006). These

characteristics are strongly appealing to institutional investors seeking conservative growth with

low investment risk. Pension funds in particular see the infrastructure asset class as a substitute

for long-duration fixed income (Orr, 2005). In 2006, $8 billion of infrastructure investment in

Australia accounted for approximately 2% of the countrys $900 billion in superannuation (Peng

2007). By 2012, infrastructure investment is expected to increase to $65 billion 5% of total

superannuation fund assets (Peng, 2007 and Nielson, 2005).The infrastructure asset class is susceptible to systematic risks, such as in (i) credit market

contractions which may cause reduced access to debt for infrastructure financiers/operators; and

(ii) increases in bond yields, where investors exit infrastructure assets for bond investments as

the risk premium increases under such scenarios. Non-systematic risk includes (i) interest rate

risk for asset/operational financing and refinancing; (ii) operational risk in adjacent businesses

subject to cyclicality (such as airline risk on airport revenues); and (iii) changes in regulatory

policy on regulated utilities (RREEF 2006, ASX 2006).


9/24

9

2. The Australian Infrastructure Market: a Case StudyEnvironmental Overview

In the 1990s in Australia changes occurred in the role of Governments in the provision of

infrastructure with trends shifting towards Government facilitating the private sector provision of

infrastructure by way of partnership (House of Representatives, 2003). The infrastructure

investment opportunity for private sector operators in Australia originated in (1) the privatisation

of Government trading entities in the 1990s, owing to microeconomic reform policy to use the

proceeds of asset sales to retire outstanding Government debt and to incentivise private

companies to operate these entities with higher service standards and competitive pricing for

end-users (CFS 2006); and (2) the entry into public private partnerships with private sector

consortia to engage private business efficiencies for the delivery of public infrastructure. The

scale of privatisation in Australia undertaken between 1990 and 1997 was second only in dollar

value to the United Kingdom (the most advanced market for privatization) in that period (RBA,

1997).

Profitable investment opportunities in the mature Australian infrastructure market have existed

since the privatisation period. The UBS Australia Infrastructure Index (a sub-index of the

S&P/UBS Infrastructure and Utilities Index, the benchmark industry index) reports returns of

20.2% (annualised returns) over ten years, 30.2% over five years, 28.4% over three years and

32.2% over one year for Australian infrastructure versus returns for UBS Global Infrastructure of

13.8% over ten years, 29.5% over five years, 29.5% over three years and 26.7% over one year.

The transition to investable assets


10/24

10

Infrastructures supply-side problem emanated from the fiscal constraints on Government which

had led to underinvestment in infrastructure maintenance, renewal and development, persisting

against unsatiated end-user demand for essential services. The origin of infrastructure as a

distinct asset class transpired from opportunistic private sector financiers and infrastructure

operators exploiting this supply/demand imbalance through structural innovations of the

infrastructure fund and through the placement of cash inflows from superannuation funds

seeking stable, long-yielding investment opportunities.

Supply of investment opportunities for financiers and their co-investors is dependent on

Governments willingness to privatise assets and to enter into Public Private Partnerships (Orr

2007, RREEF 2006, ASX 2006). Presently, the domestic market for infrastructure investments

has reached a level of maturity where demand now outstrips supply for infrastructure assets.

Infrastructure funds

The infrastructure funds analysed in this paper are indicative of infrastructure funds commonly

operating in Australia with global investment mandates. Macquarie Infrastructure Group (MIG)

develops and manages toll roads around the world. Macquarie Airports (MAp) is one of the

worlds largest private airport owner-operators. Babcock and Brown Infrastructure (BBI)

acquires and manages diversified infrastructure assets globally, across three asset sub classes:

energy distribution and transmission, transport infrastructure and power generation. Babcock and

Brown Wind Partners (BBW) is a globally diversified listed stapled entity investing in wind

energy generation assets. Macquarie Bank Limited is a diversified full-service investment bank,

whilst Babcock and Brown Limited is a specialised infrastructure and real estate asset manager.


11/24


12/24

12

listed vehicle market capitalisation growth and lower fee structure scrutiny (Merrill Lynch,

2006).

Data Sources and Analysis

Analysis is conducted using Australian macroeconomic data for December 1996 to December

2006 (the sample period). The chronological logic for this sample period is that Macquarie Bank

lists its first infrastructure fund, Macquarie Infrastructure Group, on the Australian Stock

Exchange in December 1996, with ten years providing a logical sample period for organic and

bolt-on growth and the entry of and Babcock and Brown as a competitor in the infrastructure

fund market in October 2005.

Data sources include inflation and interest rates from The Reserve Bank of Australia (RBA);

superannuation statistics from the Australian Bureau of Statistics (ABS) and Australian

Prudential Regulatory Authority (APRA); share prices and associated information from the

Australian Stock Exchange (ASX); and indices from UBS Australia.

Pre-Macquarie Infrastructure Group listing - the immediate prior corresponding period from

January 1990 to December 2006

Based on what would be in future treated as the macroeconomic drivers of the infrastructure

asset class, December 1996 was an opportune time for a macroeconomic-interpretive

entrepreneur to list the first infrastructure fund on the ASX. As Australia came out of recession

in the 1990s, RBA monetary policy decisions to cut interest rates led to a decline of interest rates

from 17.5% in January 1990 to 6.5% in December 1994, the point at which Macquarie

Infrastructure Group listed on the ASX (Figure 1.1). During this same period, 10-year Australian

Government bond yields decreased from 12.8% in January of 1990 to 7.7% in December 1996

(Figure 1.1) as a result of asset privatisations (all classes) being used to retire debt (RBA). The


13/24

13

RBA consumer price inflation rate (all groups) decreased from 8.6 points in March 1990 to 1.5

points in December 1996 (Figure 1.2). Against this economic picture of low interest rates, lower

bond yields and low inflation, the S&P/ASX200 Total Return Index increased from 6,304 points

in January 1990 to 9,858.9 points in December 1996.

The activities and performance of the selected infrastructure funds and their parent companies

from the sample period based on the corresponding macroeconomic climate

If the infrastructure funds business is as reliant on macroeconomic factors as suggested and

corporate directors are interpretative of domestic macroeconomic indicators in decision-making,

there should be some logical correlation between company decisions and macroeconomic

movements. Decisions made by Macquarie Bank Limited and two of its infrastructure funds,

Macquarie Infrastructure Group and Macquarie Airports were examined for the period of

December 1996 to December 2006; and by Babcock and Brown Limited and two of its

infrastructure funds, Babcock and Brown Infrastructure and Babcock for the period of July 2005

to December 1996 and Brown Wind Partners for the period of September 2004 to December

2006.

The most significant macroeconomic movements over the sample period include 10-year

Government bond yield dropping from a high for the period of 7.37% in December 1996 to a low

for the period of 5.1% in December 1998; interest rates declining from 6% in December 1996 to

then reach a high for the period of 6.25% in August 2000, with a decline to 4.25% by December

2001, to close out the period again on a high of 6.25%; inflation remaining relatively constant

save for a high of approximately 6% from September 2000 to June 2001; and the S&P/ASX200

Total Return Index showing sustained equity market momentum, ascending from 10,000 points

at December 1996 to reach 35,000 points at December 2006.


14/24

14

Corporate announcements show that the parent companies for infrastructure funds, Macquarie

Bank Limited and Babcock and Brown Limited elect to undertake capital structure changes,

capital raisings and infrastructure fund raisings between mid-to-late-2000 to late-2001, where in

the macroeconomic climate there is a marked decrease in interest rates from 6.25% in August

2000 to 4.25% in December 2001, a marked decrease in inflation from 6.1% in September 2000

to 2.5% in September 2001 and a decrease in bond yields from 6.28% in August 2000 to 5.21%

in October 2001 (with some volatility in yields in between). During this period MBL completes

the fund raising for Macquarie Airports Group (the unlisted predecessor to MAp) and undertakes

a parent company capital raising; whilst MIG undertakes a change in capital structure (adding a

Bermuda-based third arm to its staple security), makes two significant acquisitions and

completes a large placement.

The most significant period for corporate activity within the sample space occurs between

November 2003 and May 2006, where in a period of constant low inflation, interest rates and 10-

year bond yields both hover between 5% and 6%. Corresponding to this, the S&P/ASX200 Total

Return Index rises from 17,126 points in November 2003 to 29,776 points in May 2006, the

fastest growing period for the sample. In this period, there is substantial domestic infrastructure

fund activity from MBL (one new infrastructure fund raising); MIG (two major asset

refinancings, a large placement and asset demerger); and MAp (two placements and the

acquisition of Sydney airport). At this time BNB enters the market (raising capital for 4 new

infrastructure funds); with the backdoor listing of BBI (formerly Prime Infrastructure,

conducting two domestic acquisitions and a capital raising); and the listing of BBW (acquiring

three domestic wind farms and conducting a capital raising). There is also extensive international


15/24

15

activity, from all parties, however, this is not analysed given that international macroeconomic

factors also impact corporate decision-making in this capacity.

The most constant period for all key macroeconomic indicators for the period is from October

2002 to August 2003, where a significant number of world events occur, including the Bali

bombing in October 2002, the SARS outbreak in February 2003, the Iraq war Feb 2003 and the

Jakarta bombing in August 2003. During this period, Macquarie Bank undertakes several large

domestic transactions, including the sell down of significant interests in both MIG and MAp and

the completion of an infrastructure fund IPO.

The broad performance of listed infrastructure in the sample period

Expanding the start of the sample space to the commencement of the 1997 financial year in July

2006 to the end of the 2006 financial year in July 2006 (Australian financial years are dissimilar

to calendar years), it is notable that the number of listed infrastructure entities grew from four in

July 1996 to 20 in June 2006 with market capitalisation growing from below $1 billion in July

1996 to in excess of $20 billion in June 2006 (Colonial, 2006). Over this period, listed

infrastructure funds show a higher correlation with 10-year Australian Government bond yields

than unlisted infrastructure funds, with the former exhibiting an R2 measure of 0.46 and a higher

correlation of -0.68 and the latter an R2of 0.08 and a lower correlation of -0.28 (Colonial, 2006).

Colonial explains the negative correlation as being a result of the long-term bond rate being

typically imbedded in the discount rate used to value infrastructure businesses, where holding all

else constant, if the bond rate rises, the discount rate applied to valuing the businesses will fall

and the resulting net present value (NPV) of the businesses will fall as a consequence.

Using a correlation matrix for Australian asset classes for the sample period (rolling annual

nominal total returns on monthly resets) show that listed infrastructure (using the UBS


16/24

16

Infrastructure and Utilities index as a proxy) has a strong positive correlation of 0.23 to equities,

0.33 to REITs and 0.50 to bonds (Colonial, 2006).

At a risk-free rate of 5.9%, listed infrastructure for the sample period exhibits a Sharpe Ratio of

1.5 (a measure of a reward-variability ratio), on par with other major asset classes including

equities, REITs and direct property. At a 0% risk-free rate, listed infrastructure for the sample

period exhibits a lower Sharpe Ratio of 1.1, substantially higher than equities, but only slightly

higher than REITs and direct property (Colonial).

Superannuation

Corresponding to the trend toward infrastructure investment over this period, superannuation

fund managers allocation to the asset class played an important part as superannuation earnings

during this period became and increasing important part of Australias income mix, with

superannuation assets as a proportion of GDP growing from 37.9% in June 1996 to 98.8% in

June 2006, based broadly on public policy outcomes from a Government-mandated compulsory

superannuation contribution of 9% of employees salaries. In the ten years from June 1996 to

June 2006, Australian superannuation assets nearly quadrupled from $245 billion to $912 billion

(APRA, 2007) with an industry average rate of asset growth of 14 per cent (based on improved

contributions and increased investment earnings), representing strong real growth in a period of

low inflation.

It is difficult to estimate the amount of superannuation contributions to the infrastructure asset

class and infrastructure funds in particular over this period. Estimates of infrastructure

investment by superannuation funds were estimated at 2 per cent of total fund assets in 2002 at

$8 billion, with projections that by 2012, $65 billion or about 5 per cent of projected

superannuation assets would be invested in infrastructure (Nielson, 2003). Nielson notes


17/24


18/24

18

Appendix A: Infrastructure funds a business overview

Financial Sponsors

At the company level, infrastructure funds are operated by two types of firms: financial sponsors

and industry players, the latter of which whose infrastructure funds generally house their

company assets for transparent valuations, with funds being managed by a parent entity.

Infrastructure funds may be listed or unlisted vehicles. Listed infrastructure funds can provide

the upside of greater liquidity and performance benchmarking and the downside of a lower risk-

adjusted return, given significantly higher volatility, and a higher correlation with public

equities. Unlisted infrastructure can offer a higher, risk-adjusted return due to lower volatility

and low correlation with equity and bond markets, with the downside of illiquidity and

potentially longer-term cash flow realization. Comparable to industry funds, the 72 financial

sponsor-managed funds raised in the fifteen months to July 2007 have raised US$120 billion and

have significantly greater buying power than listed infrastructure funds operated by industry

players estimated to have only $40 billion to invest in infrastructure (Orr, 2005).

Fund platforms

Typically, a financial sponsor operating an infrastructure fund will manage a portfolio of

infrastructure funds. Sponsors managing an infrastructure fund platform draw on parent company

human and capital resources and relationships to source and acquire attractive infrastructure

assets from willing vendors at or below implied fair values; to structure these transactions

effectively from financial, legal and tax perspectives; and the operational capabilities to manage

these infrastructure assets so as to deliver value for investors. The business model is based on an

asset manager (or an investment bank with asset management capabilities) raising public capital

through discrete listed or unlisted infrastructure fund vehicles to finance the acquisition of


19/24

19

infrastructure assets by way of private equity-style investment with public finances. The sponsor

then uses its resources and capabilities (or those of one of its divisional business units) to manage

the ongoing operation of its infrastructure funds in exchange for trailing management and

performance fees.

Corporate Entrepreneurship

As a study in corporate entrepreneurship, the business models innovation lies in securitising

assets in an illiquid sector which are inimitable, scarce and non-substitutable and selling units to

conservative, growth-seeking institutional and retail investors seeking to make liquid

investments in an illiquid asset class (separating ownership and control).

The entrepreneurs innovation in process is achieved by deploying the firms human and capital

resources and its capabilities in financial engineering and asset management as a competitive

advantage in asset packaging. Sponsors earn Schumpterian (entrepreneurial) rents on their

structural innovations in packaging infrastructure assets which generate Ricardian (scarcity)

rents. Investors earn capital growth and income from their investment in funds. The business

model is based on intangibles including ideas, product creation, technologies, services and

advanced market understanding. Competitive advantage lies in complex intellectual property

vested in people and management processes, which is both difficult to imitate and easy for

successful sponsors to replicate geographically into new markets.

The model relies on securitising the principals operating assets, separating management from

ownership and retaining control, raising external capital to fuel growth and maximising

transactional participation opportunities. The model operates under the concept that a sponsor

does not need to own its operating assets (only the management rights to them) as they are an

impediment on the parent companys balance sheet to fast growth, being better dispersed across


20/24

20

a large institutional and retail shareholder base who can earn cumulative growth on these assets

appreciation in value and the dividends payable from their growing cash flows. A sponsor needs

only to own the management interests to these assets for which in exchange for ongoing

management and outperformance fees it provides its companys management expertise in their

finance, operation, management and maintenance. The sponsor, using its proprietary resources,

can maximize profit for itself through appreciations in asset ownership, transaction advisory fees

and ongoing management/advisory fees from managed funds and for investors through their

participation as asset owners in managed funds, receiving dividends and capital gains.

At a transactional level, sponsors typically earn upfront underwriting fees from launching the

infrastructure fund from their own balance sheet onto the equity markets; and advisory fees for

utilising their financial advisory resources (providing mergers and acquisitions advice, deal

structuring and financial arrangements). In return for delivering value for investors under this

model, sponsors earn base management fees, linked to equity under management (EUM) or

assets under management (AUM) (generally uncapped, offering unlimited upside) and

performance fees when the fund outperforms its prescribed benchmark, which are assessed on a

particular date (again, uncapped).

Transaction Structures

A typical transaction may occur by way of the following process. Firstly, the principal uses its

deal-making capability to source appropriate infrastructure asset/s to acquire (typically with

stable cash flows and generally with monopoly positions or favourable long-term contracts). The

principal then acts as its own investment banker, employing its corporate advisory and financial

engineering skills to structure and execute the transaction. Financial completion is achieved by

drawing down on finances typically from the principals balance sheet (and sometimes that of its


21/24

21

co-investors) and raising a large debt component. The principal then, acting as sponsor, transfers

the asset/s on to its most appropriate infrastructure fund by way of a related-party transaction,

booking transactional advisory and underwriting fees. The principal integrates the asset/s into its

portfolio and manages the asset/s on behalf of the fund, receiving base management fees (annuity

income streams) and performance-based management fees thereafter. If an appropriate vehicle

does not exist, a separate transaction may take place whereby the principal lists a fund (often

with a sector-specific mandate) with a collection of seed assets from its parent balance sheet.

Across the spectrum, the principal acts as a financial adviser, underwriter, broker, fund and asset

manager and principal. As the prominent example, Macquarie Bank leverages opportunities

across IBG for maximum value. For governance purposes, ISF separates its Infrastructure Funds

business from Macquarie Advisory. The Infrastructure Funds business focuses on active asset

management, investment evaluation, capital management, legal and compliance, tax and

accounting, investor and media relations. Macquarie Advisory focuses on sourcing investments

and deal execution.

Vehicles and fund structures are similar in principal to private equity investment in that they are

structured to generally make diverse investments in the sectors within their asset class and to

mobile capital quickly to take advantage of potential deals. The comparative distinctions

between private equity funds and infrastructure funds are that: (i) infrastructure sponsors possess

more diversified infrastructure asset portfolios, whereas private equity sponsors typically possess

mode diversified sector portfolios overall; (ii) infrastructure funds (and their investors) have

long-term investment approaches and more conservative equity hurdle rates, whereas private

equity funds operate under a shorter-term acquire/restructure/exit approach; (iii) sponsor party

profits in infrastructure funds lie in a fee-generating holding strategy based on asset


22/24

22

appreciation, management and outperformance fees, whereas private equity firm profits lie are

achieved by profits at terminal divestment; and (iv) infrastructure asset vendors are typically

Government parties divesting assets which provide essential services to society and if such assets

are regulated, prefer to transfer assets to long-term orientated counterparties.


23/24

23

Bibliography

APRA Insight (2007): Celebrating 10 Years of superannuation data collection 1996 to 2006. Retrieved

20 December 2007 from www.apra.gov.au

APRA Statistics: Quarterly Superannuation Performance March 2007, 2007,Australian PrudentialRegulatory Authority , INSERT PAGE. Retrieved 20 December 2007 from www.apra.gov.au

Australian Securities Exchange (ASX), 2007, Listed Managed Investment (LMI) Fact Sheet

Australian Securities Exchange (ASX), 2006, Infrastructure Funds LMI (Series) Fact Sheet

Colonial First State Global Asset Management, 2006, Investing in Infrastructure The Australian

Experience

Colonial First State Global Asset Management, 2006, A Guide to Infrastructure Investments

Chancellor, E and Silva, L, 2007, May 5, The Wizards of Oz: Not making sense of Macquaries businessmodel, breakingviews. Retrieved 20/08/2007

http://www.breakingviews.com/2007/05/30/Macquarie.aspx?e=c0i2oSU309V

Faye, M and Yepes, T, 2003, Investing in Infrastructure: What is Needed from 2000 to 2010, The World

Bank Infrastructure Vice Presidency

Gans, J. and Stern S., 2003, Assessing Australias Innovative Capacity in the 21st Century, Intellectual

Property Research Institute of Australia (PRIA)

Haigh, G., Whos Afraid of Macquarie Bank, The Monthly, July 2007, pp 20-24

House of Representatives Standing Committee on Transport and Regional Services, 2002, BackgroundPaper: Economic and Social Impacts of the Privatisation of Regional Infrastructure and GovernmentBusiness Enterprises in Regional Rural Australia

Jefferis, C. and Stillwell, F., 2006, Private Finance for Public Infrastructure: The Case of MacquarieBank, Journal of Australian Political Economy, vol. 58

Maclean, B., Would you buy a bridge from this man? October 2007, Fortune Magazine, pp 47-50

Merrill Lynch (Australia), 2005, Creating Holey Dollars

Merrill Lynch (Australia), 2007, Revisiting the virtuous circle

Merrill Lynch (Australia), 2007, More Holey Dollars

Morgan Stanley Australia Limited, 2007, Infrastructure Industry: Trends in Investing. Sydney.

Nielson, L., 2005, Superannuation investment in infrastructure. Parliament of Australia, Canberra.

Orr, R, The Privatization Paradigm: Jumping onto the infrastructure bandwagon, Infrastructure Journal,

Sept/Oct 2006, pp16 - 18


24/24

24

Orr, Ryan J. "The rise of infra funds." Project Finance International - Global Infrastructure Report 2007,Supplement, June, 2007, pp 2-12.

Peng, H. P. and Newell, G., 2007, The Significance of Infrastructure in Investment Portfolios, Pacific

Rim Real Estate Society Conference 21-24 January 2007, Fremantle

Reserve Bank of Australia Bulletin, 1997, Privatisation in Australia,

RREEF Research, 2005, Understanding Infrastructure. RREEF Real Estate and Infrastructure

Research: London.

RREEF Research, 2006, Opportunities in Private Infrastructure Investment in the US. RREEF Real Estate

Research: San Francisco.

RREEF Research, 2007, Performance Characteristics of Infrastructure Investments. RREEF Real EstateResearch: San Francisco.

Senate Select Committee on Superannuation, Investment of Australias Superannuation Savings,December 1996, Chapter 3.

UBS Investment Research Australia, 2006, UBS Infrastructure and Utilities Index Global Index Report

UBS Investment Research Australia, 2006, Q-Series: Infrastructure and Utilities

UBS Investment Research Australia, 2007, Global Analyser: Global Infrastructure and Utilities Analyser

australian infrastructure funds research paper

Documents