AMP Capital’s purchase of a small social infrastructure fund from the Royal Bank of Scotland 10 years ago has become a rare beacon of hope for the troubled manager riding an ESG trend and the search for stability in an uncertain world.
The AMP Capital Community Infrastructure Fund, known internally as CommIF, now has 19 investments with a total enterprise value of about $7 billion, following continued activity during the COVID-19 crisis. Prior to its purchase from the Royal Bank of Scotland in September 2010, the fund, then known as the ‘RBS Social Infrastructure Trust’, held investments totalling $80 million, the most prominent being in a PPP (public private partnership) over Sydney’s Royal North Shore Hospital.
In May this year, AMP Capital’s infrastructure team purchased another 30 per cent interest in an Auckland South correctional facility, designed for rehabilitation, having initially purchased 40 per cent in December last year. The stake is owned by both CommIF and AMP Capital’s ‘Core Infrastructure Fund’. It is the manager’s fourth social infrastructure investment in New Zealand.
At a webinar update on the CommIF last week (November 18), the fund’s portfolio manager, Charles Savage, said there had been no material impact on performance and no material impact on asset valuations during COVID.
He said the fund had also maintained a stable distribution pathway, with further net inflows this year, with a queue for future investments. “We just did our most recent acquisition in September,” he said. “We’ve had nil abatements, by maintaining 100 per cent ‘availability’ (continued operations) by the assets and maintained our refinance program and our reputation.”
Due to the contract, or ‘concession’ with governments in a PPP or PPP-style investment that is preferred for CommIF, the government will still have to pay its private partner when lack of usage is beyond its control, such as during COVID. This means that the public partner will try to use the facility for another purpose during such times.
In this case, for AMP Capital, at Perth’s Optus stadium, in which it has a 50 per cent stake, the Government pivoted after major sporting fixture were cancelled for several months and used the facilities as a command centre for response to the crisis. Similarly, additional beds were installed at Royal North Shore Hospital to help cope with a possible surge in admissions.
Savage said: “Therefore, availability-based PPPs are more stable and have long-term returns which are ideal for pension funds.” Julie-Anne Mizzi, who was a social infrastructure portfolio manager at AMP Capital prior to the RBS purchase, having joined the organisation in 2007, said PPP-style social infrastructure investments rated highly in each of the three major risks associated with infrastructure investing generally.
Now the global head of social infrastructure, Mizzi said those main risks were:
- ‘intrinsic, which was where the investor could end up with a standard asset, suffer a cub-contractor’s failure or be hurt by a change in regulations; “the actual level in regulation is not so critical but changes are”, she said
- ‘access risk’, which means illiquidity, which is inherent in unlisted infrastructure generally, and
- ‘economic risk’, which depends on the nature of the asset; “infrastructure is not homogenous, every asset is different, but social infrastructure is largely immune from economic risk”.
Mizzi said that AMP Capital ranked its infrastructure from ‘core’, being standard infrastructure projects, through to ‘super core’, which is where social infrastructure resides. The sorts of total return an investor can expect from social infrastructure were about 7-8 per cent annualised, compared with 10-12 per cent at the top end of the spectrum with both the highest risk and highest expected return.
Because of infrastructure funds, in general, having stable returns and stable costs, leverage can be applied. An interesting aspect, though, is that it is next to impossible to secure 30-year debt to match the life of a particular project, so refinancing becomes important and is another risk for the asset class.
Perhaps more than one would expect, reputational risk and the potential to damage relations are a major concern for many big investors. Brett Himbury, the former managing director of competing infrastructure manager IFM Investors, can attest to this. He was blasted onto the front page of a London tabloid when Manchester Airport closed due to an industrial dispute over baggage-handling in 2018. The airport continues to suffer from higher-than average delays and cancellations. IFM has been a passive investor in the Manchester Airport Group since 2013 and has nothing to do with the airport’s daily management.
But reputations can be enhanced too. While this has not been AMP’s best year for management reputation, with former chairman David Murray resigning after a harassment scandal involving a senior AMP Capital executive, has chipped in on the positive side.
A study undertaken by the operators of one of AMP’s social infrastructure investments in South Australia, where 17 dilapidated schools in a poor part of Adelaide were knocked down and replaced with seven new well-equipped schools shows what can be done with good infrastructure. The graduation rate at the old schools was 57 per cent but this shot up to 100 per cent at the new schools, Mizzi said. AMP Capital has recently contracted a consultant to assist it in better measuring the social benefits from its social infrastructure projects.