Unlisted infrastructure firms in buffeted world

Unlisted infrastructure will also be impacted by expected volatility and higher interest rates this year, but the negative and positive may well cancel each other out, unlike listed assets.

In a relative sense, unlisted infrastructure should be more stable in the aftermath of last year’s major and unexpected global events, such as the Trump presidency in the US, than listed equities, for instance. And not just because of less frequent valuations.

According to Nicole Connolly, executive director, IPIF Management, unlisted infrastructure with regulated and more certain cashflows will probably be less volatile and provide more certain outcomes for investors in 2017.

IPIF (Infrastructure Partners Investment Fund) is one of the few Australian infrastructure multi-managers available to retail investors. It currently invests primarily in the Hastings Utilities Trust of Australia (UTA) and the Colonial Global Diversified Infrastructure Fund (GDIF) through the IPIF ‘core’ fund.

Connolly says in the IPIF quarterly investor report: “Unlisted infrastructure may see continued pressure on discount rates, however these are only one factor in the valuation of assets. Historical analysis indicates that movements in discount rates have not impacted performance because valuers take a long-term view of rates and offset short-term movements in the risk-free rate with changes in alpha (asset specific risk premium).

“In terms of operating cash flows for infrastructure assets, increased interest rates increase debt costs, but also influence revenues. For regulated businesses allowed returns will increase. For GDP assets, high interest rates typically follow increasing inflation and economic growth, both of which are positive.”

In Australia, more than a dozen transactions were completed in the December quarter – notably the $16.2 billion received by the NSW Government for the long-term lease of 50.4 per cent of electricity distribution network Ausgrid to IFM and AustralianSuper and the acquisition of Glencore Rail for $1.14 billion by Genesee & Wyoming and MIRA.

The other notable event was a $7.5 billion indicative takeover offer by Cheung Kong Infrastructure (CKI) for listed utility owner DUET. CKI is currently undertaking due diligence and will have to satisfy other regulatory and approval hurdles should it look to formalise its offer.

Connolly says that key transactions underway include the proposed privatisations by the NSW Government of its Land and Property Information business, and a long-term lease over 50.4 per cent of Endeavour Energy, representing the last of the current electricity networks pipeline.

“Private sector opportunities continue to come to market regularly with a focus in the smaller to mid-size contracted power space,” she says.

Current transactions include the greenfield development of Stockyard Hill wind farm, Darling Downs gas pipeline and water operator Trility.

Globally, transaction activity remains strong across a number of sectors, Connolly says. European deals are occurring across gas transmission and distribution sectors. North American activity remains concentrated in the merchant power and renewable sectors with a number of thermal and renewable assets changing hands. Transactions are also regularly occurring in the gas space as electricity companies seek to diversify.

The European pipeline for upcoming investments remains strong, she says, with a range of opportunities in continental regulated assets (Finland, Portugal, Spain), contracted utilities and some opportunities in the transport (namely airport) sector. The North American pipeline remains focused on contracted power generation, regulated utilities and select transportation opportunities.

The IPIF core fund is invested 70.6 per cent in Australia, followed by 19.6 per cent in the UK, 3.9 per cent in New Zealand, and the rest in Europe and the US.

The fund, which was launched early last year, has about $44 million under management. Its chair is Steve Merlicek, who is also the CIO of the big multi-manager IOOF, and the other non-executive director is Hugh Gurner, a real estate expert.