February 2016 | infrastructureinvestor.

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FOR THE WORLDS INFRASTRUCTURE MARKETS

AUSTRALIA
REPORT 2016
HEATING UP
FROM LARGE-CAP TO
THE MID-MARKET,
COMPETITION INTENSIFIES

RENEWABLES
BOOM TIMES COMING?

TRANSGRID

INSIDE THE BLOCKBUSTER DEAL

SPONSORS HASTINGS FUNDS MANAGEMENT | PALISADE INVESTMENT PARTNERS

Infrastructure Investor
Australia Report 2016
3. Introduction
With the privatisation steamroller unlikely to slow
down, 2016 should be a busy year for investors. But
there is a lot more to the Australian market than bigticket deals, writes Siddharth Poddar.
8. Interview: Andrew Faber, Hastings Funds
Management
The captain
Hastings anchored what NSW Premier Mike Baird
called a United Nations of a consortium to win the
A$10.3bn TransGrid electricity network privatisation.
Andrew Faber takes us inside one of last years
biggest deals.
12. Sector focus: M&A
Strong pipeline
Investors expect to see a steady number of privateto-private infrastructure deals in 2016, writes
Siddharth Poddar.

16. Sector focus: Renewable energy

Two steps forward, one step back
A newly negotiated RET has given investors new
hope. But for deal flow to pick up, government must
shed its ambivalence towards clean energy, argues
Siddharth Poddar.
18. Investor profiles
Inner workings
Data profiles and contacts for five top Australian
asset owners. Learn more about their infrastructure
strategy, appetite and allocations, plus sector and
geographic preferences.
23. Data room
Hot numbers
Smaller deals suggest Australia is not just about
headline-grabbing sales. Power and oil & gas
dominate the upper echelons of our top 10, with
transport charting further down.

14. Interview: Roger Lloyd, Palisade Investment

Partners
Staying ahead
Relentless competition for Australian assets is
trickling down to the mid-market. Palisades Roger
Lloyd explains how to stay ahead of the crowd.

AUSTRALIA REPORT 2016

OVERVIEW

The AusGrid and Endeavour Energy sales should keep investor interest in poles and wires high

A tale of two markets

With the privatisation steamroller unlikely to slow down, 2016 should be a busy year for investors. But
there is a lot more to the Australian market than big-ticket deals, writes Siddharth Poddar

ver the last year, the

defining characteristic of
Australias infrastructure
market has arguably been
its increased bifurcation.
What we are seeing is that there are
some huge trophy assets being sold for big
prices, with people willing to transact at
up to 25 times EBITDA [earnings before
interest, tax, depreciation and amortisation]. On the other hand, we see reasonable transactions in the 10 to 15 times
EBITDA range in the small and medium
[deals] space, says Tom Snow, executive
director of Whitehelm Capital.
While bigger investors are on the
lookout for deals with a minimum size
of A$150 million ($103 million; 95 million), they are conspicuously absent at
the smaller end of the market. Snow
says this segment is dominated by local
investors and smaller players with much

AUSTRALIA REPORT 2016

higher hurdle rates. These assets are usually negotiated, exclusive transactions not
run through competitive bid processes,
he adds.

What we are seeing is

that there are some
huge trophy assets
being sold for big
prices, with people
willing to transact
at up to 25 times
EBITDA Snow

The biggest factor contributing to this

market division is the privatisation push
across several Australian states, which are
selling marquee brownfield assets to sovereign wealth funds, pensions and other
institutional investors on long-term leases
in a bid to raise capital to re-invest in the
development of new infrastructure, such
as roads, hospitals and schools.
Reluctant to class these sales as privatisations due to the political sensitivity
around private ownership of public infrastructure, state governments commonly
refer to this process as asset recycling.
So far, New South Wales (NSW) has led
the way in recycling its assets, thinking about
things like maintaining strong credit ratings,
but also investing in new infrastructure to
boost productivity and improve standard
of living, says Michael Cummings, head of
infrastructure equity funds for Australia and
New Zealand at AMP Capital.

INFRASTRUCTURE INVESTOR

ROUNDTABLE
OVERVIEW

The poles and wires

businesses have a
clear regulatory
framework
governing them and
the risks and the
opportunities are
all very transparent
Cummings

THE PRICE IS RIGHT?

Last years privatisation of electricity
grid operator TransGrid on a 99-year
lease for A$10.3bn was a blockbuster
deal for both NSW and for Australias
privatisation programme. NSW expects
to make about A$7 billion from the sale
after paying off some A$3 billion of debt
attached to the business.
Closed last November, it was awarded to
a consortium led by Hastings Funds Management, which also included Canadian
pension CDPQ, Australian Stock Exchangelisted Spark Infrastructure, Kuwait Investment Authoritys Wren House and Tawreed
Investments, a subsidiary of Abu Dhabi
Investment Authority.

INFRASTRUCTURE INVESTOR

The winners fought off competition

from a number of heavyweight consortia, including a tie-up between State Grid
Corporation of China and Macquarie
Infrastructure & Real Assets; a consortium of AustralianSuper, Canada Pension Plan Investment Board and Borealis Infrastructure; and a pairing of IFM
Investors and QIC.
The price paid by the winning consortium valued TransGrid at 1.6 times
its regulated asset base and came in considerably above the A$9 billion pre-sale
market consensus. Perhaps unsurprisingly, it reignited a mounting concern
regarding Australias privatisation programme: are investors overpaying for
these assets?
Its a valid concern, especially when
you consider that many of the assets
being privatised are high quality, strategic assets. As a result, they are attracting
bidders from both Australia and overseas,
who often get stuck in what one investor called ridiculously competitive bidding wars, inflating prices by paying too
much for these assets.
Not everyone agrees with that assessment, though. The poles and wires businesses have a clear regulatory framework
governing them and the risks and the
opportunities are all very transparent.
Following that, it comes down to the
various assumptions that buyers have
about these assets, in terms of growth,
operating efficiencies, and capital and
tax structure, AMP Capitals Cummings
argues.
He goes on to say these assets compare favourably to the greenfield toll
roads of yesteryear, where investors were
asked to take on patronage risk. The current long-term, lease-style privatisations,
on the other hand, are more brownfield,
with established earnings profiles.
Ross Israel, QICs global head of
infrastructure, believes there are several
aspects to be considered before concluding that investors have paid too much for
these assets. The first thing to bear in
mind is that the assets that have been sold

are highly strategic, which makes their

market position very valuable. In Ross
view, there is also clearly an opportunity
for further commercialisation of these
businesses, which was not widely pursued
under government ownership.
Secondly, talk of overpaying risks simplifying investors return calculations.
[Whether it is] for relative returns
against other asset classes, or against their
existing portfolio returns, [considering]
the duration these assets provide and the
infrequency of the opportunity to acquire
them, different buyers [will] bring varying perspectives, which drive contrasting
views on value, Israel explains.
The third thing we at QIC believe
is that infrastructure is at an inflexion
point, he adds. By that, Israel means that
infrastructure is ripe for technological
disruption, particularly through automation, which is likely to lower capex in

AUSTRALIA REPORT 2016

OVERVIEW

Foreign ownership:
the ghost of Port of
Darwin
As is the case with the privatisation of
infrastructure assets anywhere in the world,
there have been concerns over foreign
ownership of Australian assets.
A good example was the Northern
Territorys (NT) 99-year, A$506 million Port
of Darwin lease to Chinas Landbridge
Group. Since the award, the deal has come
in for fierce criticism. Domestically, many
believe the sale of a highly strategic asset to
the Chinese may not be in Australias best
interest. But the Port of Darwin lease has also
ticked-off the US, a close ally of Australias,
which was caught off guard by the sale.
Darwin happens to be a hub of military
cooperation between the two countries.
At the heart of domestic and international
concerns is the Landbridge Groups alleged
close ties to the Chinese military. And to top
it all off, the NT authorities have also come
under fire after it emerged the port had
been leased without full due diligence by
Australias Foreign Investment Review Board.
The delayed A$7bn Port of Melbourne privatisation should finally come to market this year

the future and extend asset lives. Data

analytics too will drive and optimise commercial operations in the future.
As such, it is perhaps too early to
assess the prices paid for the assets that
have just been privatised, with a clearer
picture only likely to emerge in a few
years, once new owners have had time
to implement their business plans and
carry out operational change.

Investors, however, do not believe the

kind of criticism received by Port of Darwin
reflects Australias attitude towards foreign
investment. In fact, they counter, Australia

We believe
infrastructure is at
an inflexion point
Israel

has long been welcoming of foreign

investors. Some of these assets are very
strategic, so there is a level of sensitivity
around foreign ownership. [But] the
sensitivity is not unique to Australia, it can
be seen in many other jurisdictions around
the world, argues QIC global head of
infrastructure Ross Israel.
That is not to say foreign investors

LOOKING AHEAD
So what is still on the privatisation menu?
Short answer: a lot more deals.
This year promises to be another busy
year for privatisations with assets such as
electricity and transmission networks
AusGrid and Endeavour Energy to be
sold in NSW. The government will sell
the 99-year lease of 50.4 percent of each
company to private investors, contrasting
with TransGrid, which was 100 percent

AUSTRALIA REPORT 2016

particularly the Chinese will not be wary

following the fallout over Port of Darwin. But
what Port of Darwin perhaps emphasises
is the need for foreign investors to partner
with local players to allay fears of foreign
ownership of assets that are perceived to
be of significant national interest. It also
highlights the need for negotiations to
be fully transparent, explaining clearly to
the public the rationale for the sale of a
particular asset to a particular buyer.

INFRASTRUCTURE INVESTOR

ROUNDTABLE
OVERVIEW

privatised. The sale of these two assets

alone is expected to be worth about A$13
billion.
In Victoria, Port of Melbourne, which
is Australias biggest port for containerised and general cargo, is expected to
be leased for 50 years with a 20-year
extension option for some A$7 billion. Whereas in Western Australia,
Port of Fremantle could potentially be
privatised as part of an asset recycling
programme that might see the state government raise between A$3 billion and
A$5 billion.
With the exception of Queensland,
which changed tack and has cancelled
a number of previously proposed asset
sales, says AMP Capital Core Infrastructure Fund portfolio manager John
Julian, investors expect to see a continued privatisation drive as state governments are faced with constrained
balance sheets coupled with a need
to invest in greenfield infrastructure
projects.

The requirement
to meet the
Renewable Energy
Target provides a
substantial tailwind
for renewables in
Australia Michalas
Julian says the federal government is
supportive of the initiative and is encouraging state governments to further privatise
assets by providing 15 percent of the funding for these new greenfield projects, to
be used alongside the recycled capital that
is ploughed back into the development of
new infrastructure.
Which doesnt mean the privatisation
programme will be all plain sailing. Selling
assets can be a long and onerous process
and Whitehelm Capitals Snow says that,
while there are very good assets on the table,

there is still no certainty all of them will be

privatised. And it is true that there have
been delays with the privatisation of assets
such as Port of Melbourne, not to mention
the U-turn in Queensland. What is clear,
though, is that the federal and state governments will continue to be important players
shaping Australias infrastructure market
over the next couple of years at least.
THE OTHER SIDE
However, as we alluded to in the beginning of
this article, there is another side to Australias
infrastructure market. And while the focus
of much of the investment community has
been on the big-ticket privatisations, there
has been a steady flow of private-to-private
deals as well, mostly involving smaller assets
(see page 12).
Investors are seeing opportunities in
the energy sector, particularly given the
low oil price and its impact on the large
players in the space. They also expect
opportunities to come from the mining
sector over the coming months.

NSW Premier Mike Baird masterminded the record-breaking A$10.3 billion TransGrid sale

INFRASTRUCTURE INVESTOR

AUSTRALIA REPORT 2016

OVERVIEW

Tim Michalas, a Sydney-based vice president in the private infrastructure team of

Zug-based Partners Group, believes the
strongest investment opportunities are
in greenfield renewables and availabilitybased public-private partnerships. The
requirement to meet the Renewable
Energy Target provides a substantial tailwind for renewables in Australia, he says.
Other infrastructure opportunities are
likely to emerge from Australias growing connection to Asia, with respect to
food supply and agriculture, argues QICs
Israel. He explains there is an opening for
northern Australia to establish itself as
Asias breadbasket, which, in turn, would
set off the development of road, rail and
port infrastructure.
As Asias middle class becomes wealthier, it will also look to travel more, with
Australia emerging as one of the more
popular destinations for Asian tourists.
Investors say some tourism-related infrastructure needs to be upgraded, which
will create opportunities for investors.
This is particularly true in the case of
airports.
For AMP Capitals Cummings, it is
the mid-market that offers better value
though. We saw a lot of activity in the
second half of last year and we dont see
that changing in the next 12 months. We
also expect to see improved conditions
for renewables and we think miners and
energy companies will continue to sell
non-core infrastructure assets.
If there is one lingering concern, it is
the earlier discussion on valuations for
large-scale, auction-driven core infrastructure transactions. To some extent,
that is being driven by a very low interest rate environment. However, Daniel
Roberts, an investment director at Palisade Investment Partners, cautions that
current debt market terms are unlikely
to be available at the time of the next
refinancing, in five to seven years.
All things considered, though, 2016
looks set to be another bumper year for
Australian infrastructure. n

AUSTRALIA REPORT 2016

What about PPPs?

There is a belief in Australia that the

asset recycling will eventually go into new

number of public-private partnerships

infrastructure development, which in turn

(PPPs) has slowed down somewhat

will lead to opportunities for new PPPs or

over the last two to three years. Daniel

direct private investments.

Roberts, an investment director at Palisade

Investment Partners, says PPPs have

According to Cummings, the utopian

been very successful over the last four to

view would be that state governments

five years. However, equity cheques are

use the money they are getting from the

reducing for a variety of reasons and the

privatisations to take risk off the table

delivery model is evolving.

by getting roads or hospitals built and

then leased out. That way, things like

Equity cheques are shrinking partly

patronage risk are managed by the party

because contractors are taking higher

best-positioned to take on these risks. In

equity positions, partly because gearing

the case of schools, hospitals and roads,

levels are increasing and partly because

the greenfield and patronage risk is much

states are providing additional financial

better managed by the state, he says.

contributions. Governments in Australia

are increasingly looking at models such as

It is no secret that Australian state

value-capture, says Roberts, which present

governments need private participation

a whole new set of challenges for the

in the development of greenfield

investment community due to the addition

infrastructure, owing to the high level

of different risks.

of debt they have on their books. Most

states, for example, currently have high

He adds that another changing aspect

levels of public expenditure in areas

is that, rather than just focusing on the

such as public transport, which is still

provision of assets, governments are

largely funded by government rather than

looking at the private sector to provide

users. This may not be sustainable going

a more service-based offering for

forward, particularly as states also need

instance, to reduce the load on the public

to invest in welfare and health services,

healthcare system.

according to a report by QIC.

As a consequence, Tom Snow, executive

It is therefore not surprising that several PPP

director of Whitehelm Capital, says the

projects are anticipated across Australia in

greenfield pipeline has slowed down

2016-2017. These include Sydney Metro,

considerably. [The pipeline] has tilted

Parramatta Light Rail, NSW Hospitals, NSW

from being predominantly greenfield to

Prisons, NSW Social Housing, and New

predominantly brownfield privatisations.

Castle Light rail in New South Wales; the

Canberra Metro Light Rail in Australian

Snow suspects state focus has shifted to

Capital Territory; Victoria Rolling Stock

privatisations due to the high pricing and

and the Melbourne Metro in Victoria; Gold

abundance of investor interest in these

Coast Light Rail Stage 2 in Queensland; and

assets. He also highlights the federal

Perth Light Rail in Western Australia.

governments Asset Recycling Initiative,

which offers a 15 percent bonus to state

If all of them come to fruition, the slowdown

privatisations, to be invested in new

in the Australian PPP market might just be

assets. Still, the money used from this

about to lift.

INFRASTRUCTURE INVESTOR

ROUNDTABLE
SECTOR
FOCUS

M&A

Strong pipeline
Investors expect to see a steady number of private-to-private infrastructure deals in 2016, writes
Siddharth Poddar

Private-to-private transactions should continue to flow in 2016

t is not surprising that the privatisation

of state-owned assets is grabbing all the
attention, but there is also a significant
amount of deal flow in the private-toprivate space, with investors not expecting
that to slow down in 2016.
Ross Israel, global head of infrastructure
at QIC, says there are a few areas that will
offer opportunities going forward. One is
the natural resources sector, where commodity prices have hit many firms. According to Israel, that should lead companies in
the sector to sell non-core assets down the
supply chain. Much the same can be said for
the energy sector, where companies hit by low
oil prices are selling non-core assets, as they
struggle to rebalance their balance sheets and
improve cash flows.
Michael Cummings, head of infrastructure equity funds for Australia and New
Zealand at AMP Capital, argues that something similar is likely to happen in mining
too. I dont think the mining sector in
Australia has got its head around it yet
it has traditionally held the entire supply
chain on its own, Cummings says. Going
forward, though, he believes the sector will
have to readjust its balance sheet, so there
will be deal opportunities for private investors in mining as well.

12

INFRASTRUCTURE INVESTOR

I dont think the

mining sector in
Australia has got its
head around it yet
it has traditionally
held the entire
supply chain on its
own
Coming back to energy, storage is another
area that has seen investor interest of late.
A good example was last Octobers A$1.78
billion ($1.22 billion; 1.12 billion) sale of
Iona Gas Storage by a subsidiary of Hong
Kong-listed China Light and Power Group
to a consortium comprising QIC Global Infrastructure Fund and QIC clients. Iona provides
gas storage facilities to domestic integrated
utilities, allowing them to service intermediate
and peak gas demand.
Perhaps the most engrossing story unfolding in the global infrastructure market presently is the bidding war for Australian rail and
port operator Asciano. A consortium comprising New York-based Global Infrastructure

Partners offered $6.3 billion for the company

in November, only marginally higher than
what was offered in August by a Brookfield
Infrastructure Partners-led team, intensifying
competition for the deal.
Ascianos board has already approved
Brookfields offer and continues to support
it, but regulatory approval for the deal has
been harder to get, with the Australian Competition and Consumer Commission expressing concerns about Brookfields offer over
competition issues.
While the deal has not yet closed (a
final decision by the regulator is expected
in February) it clearly illustrates the interest of both generalist and specialist investors
in Australias private infrastructure market.
That sort of healthy interest, of course, puts
pressure on asset pricing and not just for
marquee assets like Asciano.
Daniel Roberts, an investment director
at Palisade Investment Partners, says that
any decent asset put through a structured
sales process is likely to attract significant
investor interest. He goes on to add that,
while mid-market assets have historically
avoided competitive processes, this is now
starting to happen more frequently. As a
result, it is increasingly important to think
differently about how to deliver long-term
value, he argues.
Some investors are adopting a wait-andsee approach, biding their time and focusing
on growing their existing assets, investing
in them through expansions, development
initiatives and operational improvements.
That said, a modest increase in the currently low long-term base rates, while posing
a risk for existing portfolios, may also present
an opportunity for new investment, as it will
help moderate asset prices. Whichever way it
goes, a healthy amount of private-to-private
deal flow is a good problem to have. n

AUSTRALIA REPORT 2016

ROUNDTABLE
SECTOR
FOCUS
CLEAN ENERGY

Two steps forward, one step back

A newly negotiated RET has
given investors new hope.
But for deal flow to pick up,
government must shed its
ambivalence towards clean
energy, argues
Siddharth Poddar

he renewable energy sector

in Australia remains a story of
unfulfilled promise. Despite
having no scarcity of investors
with significant amounts of capital to invest
in renewable energy, the Australian governments ambiguity towards the sector has put
investors in a bit of a pickle. Managers want
to invest in renewables, and are indeed committed to doing so, but there are several
caveats.
The Abbott administrations repeal of
the carbon tax in July 2014 and subsequent
reduction of the 2020 Renewable Energy
Target (RET) by about a fifth plunged the
clean energy sector into near darkness.
There was some respite last June, when
the government finally settled on a new
RET of 33,000 gigawatt/hours, which
means that about 23.5 percent of Australias electricity generation in 2020 will
come from renewable sources. While the
new target is lower than the original, it at
least provides the sector with clarity after
two years of scarce investments.
In 2015, new clean energy investment
in Australia amounted to $2.97 billion,
according to Bloomberg New Energy Finance,
marginally higher than the $2.57 billion
invested in 2014, but significantly lower

16

INFRASTRUCTURE INVESTOR

than the $5.93 billion and $5.35 billion

invested in 2012 and 2013 respectively.
Michael Cummings, head of infrastructure equity funds for Australia and New Zealand at AMP Capital, says: It has been very
convoluted from a political point of view a
political football with very little agreement.
However, he adds that since the change in
government, the landscape is better than
it was 12 months ago.
Investors generally agree that 2016
should be a better year. The recent renegotiation of the RET and change of Prime
Minister have been positives for Australian
renewables and the spot LGC [large-scale
generation certificate] price reflects this,
Tim Michalas, a Sydney-based vice president
at Partners Groups private infrastructure
team, points out.
Partners Group last June invested in
the development of the Ararat wind farm,
coming in as the largest shareholder in the
240-megawatt project. Renewable Energy
Systems (RES), General Electric and Canadian pension fund OPTrust were the other

It has been very

convoluted from
a political point of
view a political
football with very
little agreement

investors. The project has a total cost of

A$450 million ($347.7 million; 282.7 million) and was one of the few that came with a
20-year offtake agreement. Not surprisingly,
the auction saw strong investor interest.
Yet, Michalas says that, with the exception
of government feed-in tariff auctions, there is
a lack of power purchase agreements being
signed with large corporates and that is
limiting new investment in the sector.
This scarcity of long-term contracts has
made it tough to invest in the Australia
renewables space for the past five years,
investors point out. That is partly because
corporates have been burnt due to legislative changes and are reluctant to sign
long-term contracts. But it is also because
Australia does not need any additional
power generation anytime soon.
Since it is also not faced with a fuel shortage, renewables have to replace traditional
fossil fuels. Of course for that to happen,
the government needs to prioritise increasing renewable generation capacity. For an
infrastructure investor, these dynamics
translate into higher risk.
AMP Capital, for instance, has reviewed
wind deals in Australia, but has not closed
on any because the price was not reflective
of the level of risk it would have to take,
Cummings explains.
That said, investors are cautiously optimistic about the renewable energy sectors prospects, particularly given the roll-out needed
to meet the new RET target over the next five
years. Whether this optimism translates into
new deals or not will depend predominantly
on political ambition and will. n

AUSTRALIA REPORT 2016