Investing in infrastructure

Hannah Langworth explores global financial services firm Macquarie's infrastructure funds business

As everyone knows, we're going through a global recession at the moment. But the infrastructure sector is one area that's continuing to prosper. Governments of struggling economies across the globe are encouraging investment in infrastructure to promote recovery, while still-thriving emerging market nations are keen to build the facilities they need to continue to develop. The result is extensive opportunities for infrastructure investors, who could be funding new road or rail networks, upgrades to utilities systems, or new power stations.

And Macquarie is well placed to take full advantage of the economic situation, as this global financial services firm is a market leader in the infrastructure investment sector. To find out more, we spoke to a senior member of the Macquarie Infrastructure and Real Assets (MIRA) team to hear about Macquarie's infrastructure funds business, which pulls together money from a number of investors and invests it in a range of infrastructure assets, from electricity companies to telecommunications systems to toll roads.

Mark Braithwaite

Executive Director, Macquarie Funds Group

Mark's career

After I left university, I went to a leading professional services firm, trained as an accountant and stayed there for four years. I then moved to work for an electricity company client, eventually becoming finance director. I was there for twelve years and then came to Macquarie and was put straight onto working at a major water company, which one of the funds here had just invested in as chief financial officer. About eighteen months ago, I came back to Macquarie again, where I now head up the acquisition, sale, and refinancing of the assets held by our funds that invest in European assets.

I've found my career working in asset management and finance in the infrastructure sector very interesting, challenging and hugely varied. You get to assess and buy assets, help to run them, hopefully see them perform well for their customers and produce a good return for investors. Also, as infrastructure is a global business, I've had the opportunity to travel extensively.

What made you decide to join Macquarie?

Macquarie is the biggest global infrastructure fund manager, which fitted well with my background in the sector. I also like the fact that, in contrast to what you find at some other financial services institutions, there are lots of people here who've worked directly in the infrastructure industry as well as in investment banking.

You work in the Macquarie Funds Group and specifically in the Macquarie Infrastructure and Real Assets team (MIRA). Can you explain what the MIRA team does?

It's a part of the bank that manages the funds that invest in infrastructure assets around the world. We currently have four funds in Europe, which together have about €10 billion (about £8 billion) invested in around 25 European infrastructure assets. Our clients, who provide the funds that we invest, tend to be pension funds, sovereign wealth funds and insurance companies.

Our investment philosophy is to aim to invest in each infrastructure asset for a period of about ten years. We're looking to provide a safe and predictable return to our clients.So we look for assets that fit that profile, which tend to be utility companies, telecommunications companies, and transport assets, such as toll roads and airports. They provide the steady returns we're looking for because there's a constant demand for the services these assets provide and because a regulator often controls their revenues to a certain extent.

How do you decide whether or not to invest in an asset?

We'll project how much revenue we think the business will deliver and what we think its costs will be over a set period of time. We'll then factor in the amount of equity and debt funding we would put into the business. From that, we'll work out the profit the business would give us. We'll also factor in the risks involved, for example, inflation - we'll run models with low and high inflation to make sure we're happy with the level of risk we're potentially taking on. We'll also talk to the team currently managing the asset and specialists in the relevant business area. Then, based on all these factors, we'll decide if we want to make an offer and, if so, determine the price we're prepared to pay. And if our price is the highest price offered, we'll generally be able to proceed with the deal.

How do you ensure that the portfolios of investments that your funds make are diversified?

Each fund has rules that set some fixed limits. For example, we might specify that only a certain proportion of a fund can be invested in a particular type of asset or geographical area.

Beyond that, it's a question of what comes onto the market. In the first few deals we're able to look at a broad range of assets and countries. But if we get to a stage where a few of our investments are in, say, German gas companies, we'll naturally make sure we differentiate into some other types of asset.

The investing period is typically about two or three years - we build the fund's assets slowly and at any one time tend to be following three or four different opportunities, assessing them both in terms of risk and return, but also in terms of how they fit into the portfolio.

What role do you at Macquarie play in the management of an asset once you've acquired a stake in it?

Once we've decided that we're going to bid for the asset, we'll put a bid team together. If we're successful in acquiring the asset, a proportion of that bid team will stay with the asset through its life in the fund.

Typically, the senior bid director plus one or two others will take board seats. They'll influence the business plan and help to make sure the management team deliver. A slightly broader team will work with the senior management team on budget, plans for the asset, investment in the asset, procurement, health and safety, and so on. So initially there's a lot of hands-on dialogue every day, both at the board level and at the senior management level.

The number of people involved and the extent of their involvement changes through the life cycle of the asset. As we gain trust with the management team, a smaller team will continue to manage the asset on an ongoing basis, as well as the people from Macquarie on the board, who typically engage with the company about once a week to help guide it. But if circumstances demand, we can put more people in again and give the company more attention.

How do you think the future looks for infrastructure investment?

Infrastructure assets provide essential services so the sector is always going to need investment for building new facilities, maintenance of existing ones and to make sure the services they provide remain affordable for users. So it's an asset class that will continue to provide attractive, relatively safe investment opportunities.

Interestingly the recession in Europe is throwing up a number of new opportunities as large European utilities and municipalities look to sell regulated infrastructure assets to raise cash and pay off large debts.

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