Want to buy an airport? Here’s how…

Hard-bitten infrastructure investor Jonathan van Rooyen, co-founder of unlisted infrastructure fund manager Invest Unlisted, kicked off a recent interview with a real estate analogy we can all relate to.

If your portfolio is a house, infrastructure assets are the concrete slab underneath. It’s an apt description, and not just for those Melbourne readers whose foundations shook last week.

Van Rooyen believes unlisted assets in this space are particularly appealing for Australian investors, but there are few ways to get reliable, targeted exposure to them. For example, six Australian capital city airports are nestled in Invest Unlisted’s portfolio — meanwhile your average investor can’t stroll into Adelaide International and offer to buy a $50,000 chunk.

“The unlisted world has a finite number of what we call 'best practice' managers who help us to identify which structures are investable and which are the best types of assets for the portfolio," Van Rooyen says.

Using a “fund of funds” structure with five underlying managers, Van Rooyen and his team buy into a book of 41 separate, unlisted infrastructure assets via a co-investment process.

And it isn't exclusively available to the big end of town. “We have an SMSF investor with $100,000 invested in our fund, having facilitated them to invest alongside our partner fund for the same fees as the likes of CBUS, Hesta, and Hostplus,” Van Rooyen says.

“That’s the first time that’s ever been done and we’ll continue to do that. We’re also moving into direct investment.”

Why? To help find excellent assets and help lower the overall cost base for investors. The ultimate goal of the fund is to keep driving down the fees and further boosting diversification in the portfolio. In this interview, Van Rooyen provides context on the Invest Unlisted strategy and the value it provides for investors.

Edited transcript

What attracted you to infrastructure as an asset class, particularly the unlisted area in which you invest?

Unlisted infrastructure is quite distinct from listed and we'll touch on that in due course. But what I really like about unlisted infrastructure is the significant barriers to entry from a competitive position in terms of the business model. Also aligned is the high level of predictability of the underlying cash flows.

So you're talking about an airport with a 75-year concession life remaining, a toll road with a 30-year remaining length of its lease, and so on. You're talking about a hospital that is under a public-private partnership model, which has got a 25-year term of its concession.

There is strong visibility around that and predictability around the actual cash flow stream. With that comes a very high conviction around the underlying cash yield, which is another area of attractiveness around the unlisted asset class. 

And then, from a financing perspective, you can get really long-dated financing. It's really low correlation with the listed markets, which is something that we are really excited about in terms of our underlying portfolio.

What role does this asset class play within a portfolio?

It's fundamental elements and a low correlation with other asset classes. It's no surprise why the likes of the Future Fund has over 5% invested in unlisted infrastructure. And again, the industry funds have been extraordinarily successful in allocating between five and 20% in unlisted infrastructure.

It's that natural diversifier away from listed markets where the underlying infrastructure, the airport, the toll road, the port, the data centre, the regulated electricity and transmission network, distribution network, don't react as listed markets do in terms of negative performance. It acts like the foundations upon which the house, the portfolio, is built. That's where unlisted infrastructure sits.

What is your investment process and how has this changed over time?

I've been investing in infrastructure for over 20 years. I think one of the things that I've learned over time is we don't look at anything with greenfield type development risk attached to it. We won't invest in emerging markets, so we own OECD only. And I think one thing that I've also observed over time is regulatory risks.

While we're very excited about some of the renewable opportunities and ESG driven thematics, we're very cautious around regulation and in the context of how are the regulations affecting those business models. So that's something we are very conscious about in terms of reviewing those sorts of assets.

In general, there are two types of investment managers. Those who've lost money, and those who are going to lose money. 

Having invested for over 25 years in this asset class, unlisted infrastructure, I've been on the wrong end of investment decisions over my 25 years. And you learn really valuable lessons that steel you in the context of recognising what is a good investment and what is one with more risk. It's fine to make those decisions, but you've just got to make sure you price that risk appropriately. 

That's probably one of the main things I've learned over my career.

Does a focus on unlisted expand the universe of assets you can choose from in the infrastructure asset class?

You certainly do, but there's a bunch of challenges with that. But to your point, the only way you can actually invest in Australian airports is through our fund. And that's certainly from the case for a wholesale investor, we are in six of the capital city airports that are seeing very strong green shoots of the post COVID world emerging. Equally, the real key is in actually selecting, and in our case, partnering with unlisted infrastructure managers. 

It's very challenging for an institutional investor to go into the US and buy a toll road or a rail asset. So partnering with really capable, well resourced global managers with transparent and observable funding investing structures is really important.

And the unlisted world has got a defined finite number of these, what we call best practice managers. And that's the real value add that we offer is to, having had that experience, to be able to identify which structures are investible and which of the managers that we think offer the best types of assets and exposures for the portfolio we're seeking to build.

How does your 'fund of funds' structure operate?

The base of our infrastructure fund offering for wholesale investors is via a 'fund of funds' structure. We currently have five underlying managers investing alongside through their 41 separate infrastructure assets. But we also co-invest with our investors, and we offer direct access to our underlying managers as well. 

I'll give you an example. Last year, we offered to co-invest alongside one of the managers which have a very low base fee, something like 33 basis points. We have an SMSF investor with $100,000 investing in our fund. We also facilitated for them to go directly into that manager investing alongside for the same fees as CBUS, HESTA and Hostplus. That's the first time that's ever been done and we'll continue to look at doing that. The next phase of our evolution I think is doing direct investment.

We're doing that for a number of reasons. The portfolio is the primary one, to deliver really good assets and invest alongside these manager partners directly. But the benefit of that comes with that is actually lowering our overall cost base to the investor. 

The idea of a 'fund of funds' is fees on fees. Well, we're fundamentally turning that on its head in the sense that offering direct co-investment, and then also direct investing alongside the managers. 

So that's something that we're doing and will continue to do with the view of driving down that overall management expense ratio and pushing diversification out to additional assets.

Unlisted Infrastructure adds balance to your portfolio

Tap into the concrete infrastructure assets that have been off-limits to everyday investors for more than 20 years. Find out more.

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