Infrastructure – Australia’s corner of global asset management

Australia punches well above its weight in global pensions, with 20 million people having created a top 5 pension asset market thanks to compulsion.

In comparison, Australian asset managers as a group haven’t enjoyed commensurate success. Yes, they dominate Australian equities as an asset class, but it’s low growth in terms of demand for active asset management (especially in institutional segments), and few offshore institutions allocate to Australian equities. In global terms, it’s small beer.

In global asset classes, although there are some spectacular individual success stories – think Platinum and Magellan – overall Australian asset managers have struggled to build long term franchises.

There are some good reasons for this, including the need for deep pockets, well entrenched and huge global competitors, and the disadvantages in competing far from major investor markets in North America and Europe.

But there is one corner of asset management where the extent of Australian dominance continues to be quite remarkable – infrastructure.

This much is made clear by the latest edition of the Towers Watson Global Alternatives Survey, which you can find here: http://www.towerswatson.com/en/Insights/IC-Types/Survey-Research-Results/2013/07/Global-Alternatives-Survey-2013 .

There are some odd numbers which have puzzled several of our clients, but it gives a useful overview of the global alternative investments industry. It’s a USD 3 trillion industry, which makes for a pretty useful revenue pool, given that alternatives normally attract some of the best margins in asset management.

Overall the list is dominated by US managers, which is no surprise. But it’s gratifying to see home-grown infrastructure pioneer Macquarie at no.1 with USD 95bn in alternatives AUM, ahead of absolute return specialist Bridgewater at USD 84bn.

The Australian accent becomes impossible to ignore when the list is segmented by share of pension fund assets in the main alternative asset classes of hedge funds, real estate, private equity, and infrastructure. The top 20 pension fund infrastructure managers include 8 Australian managers:

Source: Towers Watson

It’s not a perfect representation – some of the numbers are iffy, and RARE manages infrastructure securities rather than direct infrastructure assets, for example. But even so, it’s an impressive result.

Australian infrastructure managers have enjoyed a couple of important advantages in that super funds were early allocators to the asset class, and Australian governments have been avid privatisers of attractive assets such as airports and some of the earlier tollroads.

These factors helped Australian managers get out to an early lead. But ultimately the domestic opportunity is limited, and despite rapidly rising competition, a number of local managers have made the very difficult jump to a business which can acquire and manage assets offshore, and raise capital from offshore investors.

Particularly notable are Macquarie, which not only survived the financial crisis, but made some well-timed acquisitions and expansion moves to dominate the sector; IFM, which could easily have rested on its laurels managing local assets for Australian industry funds, but is now raising capital in Europe; and RARE, which has largely defined the global listed infrastructure securities market.

All three provide useful and quite different case studies for how Australian managers, whether large or small, can find success in an increasingly global asset management market.