In January this year Cbus announced a $140 million investment in the Indiana Toll Road (ITR), a 252 km highway that serves as a critical part of the Midwest and Northeast transportation network in the US between Chicago and Ohio. The investment is the second largest infrastructure exposure for Cbus Super after NSW Ports — Port Botany and Port Kembla, and consistent with its preferred strategy to access infrastructure investments, the transaction was conducted as a co-investment with IFM Investors.
Canstar spoke with Grant Harrison, Investment Manager, Private Markets at Cbus Super, to find out more about this strategic change in investment process.
A focus on core infrastructure assets
As superannuation funds under management (FUM) grow, it is almost inevitable that funds will give greater consideration to large infrastructure investments. Certainly it’s something that the federal government has been encouraging for more than a decade.
According to Cbus though, that consideration will be highly focused.
“We have very much a focus on core infrastructure assets; that is, infrastructure that has stable and sustainable cash flows, that provides an essential service and is monopolistic,” said Grant Harrison, citing a capital city port or airport as good examples of core assets.
“It’s also very important that we view a stable regulatory environment, irrespective of whether the asset is fully or partially regulated. As well, the investment cash flow needs to exhibit an inflationary aspect.”
Historically Cbus has gained exposure to infrastructure assets via pooled funds (where money is pooled with other investors). However, more recently this has been enhanced through co-investments. The Port Botany investment, for example, is held as a co-investment alongside the IFM Investors Australian Infrastructure Fund and the Indiana Toll Road, as the most recent co-investment is alongside the IFM Investors Global Infrastructure Fund.
“Co-investment represents an opportunity to optimise the overall composition of our infrastructure portfolio and also to optimise both costs and returns for our members,” said Mr Harrison.
So why the USA?
According to Mr Harrison, the amount of money that Cbus holds in infrastructure investments is currently in excess of $3 billion, with around half of that invested in Australian infrastructure.
“We identified that we were overweight in Australian infrastructure as a proportion of the total, and also that we were underweight toll roads,” explained Mr Harrison.
“In the USA there has been far less privatisation of assets by the government. IFM has held the Indiana Toll Road since May last year and the investment fundamentals matched our asset allocation goals as well as our investment fundamentals.”
While the federal government has been encouraging superannuation funds to invest in infrastructure PPPs (Public Private Partnerships) for many years, there are a number of necessary considerations in doing so.
“The key is that they need to be able to deliver an appropriate risk-adjusted return,” said Mr Harrison.
“Also, traditionally a PPP is up to 85% geared and that has a consequence for large growing super funds looking to invest equity with scale – what are the options to gain appropriate access? While gearing increases risk, it can be appropriately structured and scale may be tackled through a portfolio approach.”
“There is ongoing debate around the existing PPP bid process; currently it is an expensive process with a long duration (up to two years) and no certainty of outcome. There are reasons for this around proper process, but it is an impediment.”
Cbus Infrastructure goals
Overall, Cbus is targeting a long term exposure of 11% of FUM to be invested in infrastructure. To support that, Cbus is currently in the process of hiring a specialist infrastructure manager; watch this space.
Established in 1984, Cbus is the industry superannuation fund for the construction, building and allied industries.
Cbus has over:
- 720,000 members
- 99,000 employers
- $32 billion in funds under management