Industry Funds Management has defended its $US5.7 billion ($7.45bn) purchase of a US toll road, saying its critics are ill-informed and the deal is not based on over-optimistic assumptions of traffic or economic growth.
IFM, owned by 30 non-profit industry super funds, is one of the biggest infrastructure investors globally. It bought the 66-year concession to operate the Indiana Toll Road last month in one of the largest bids for a US public asset to date.
The deal raised eyebrows both in the US, where two local counties were outbid for the deal, and at home, where unnamed analysts quoted in local media described the price tag as “nuts”.
IFM chief executive Brett Himbury says 12 of his team of 35 on the ground in the US analysed the deal for “months and months” before the formal sale process began.
“The analysis that we did was far in advance of the analysis of any ill-informed commentary that followed,” he says.
The toll road runs 157 miles across northern Indiana from the Chicago Skyway to the Ohio Turnpike and came up for sale after its previous owners, including a Macquarie fund, filed for bankruptcy protection. They had bought the road in a highly indebted acquisition with 85 per cent debt funding in 2006, just before the global financial crisis hit.
In a wide-ranging interview with Business Spectator, Himbury says IFM has structured its deal much more conservatively, with about 57 per cent equity and 43 per cent debt. The debt is investment grade.
The global fund manager says the toll road is in a strategic geographic position, with an unusually long 66-year concession and returns linked to GDP and CPI.
IFM was also cautious in the assumptions it made about US economic growth, inflation and traffic volumes, all of which affect rates of return. Overoptimistic assumptions have sunk other toll road deals including the Cross-City Tunnel in Sydney.
“The assumptions we put in our core valuation base case were more conservative than any assumptions that we have seen in the course of the history of the asset,” Himbury says. (The road is 59 years old.)
So even if the moderate US recovery stalls and, as some economists including Larry Summers believe, falls into a period of stagnation, the deal will still pay off, IFM believes.
It’s a critical point because the margin between IFM’s winning bid and the underbidder was very wide compared with other recent infrastructure sales.
Privatisations of the Port of Brisbane and Queensland Motorways were heavily contested and each was sold with only 1 per cent separating the highest bidders. That sort of margin can give the winning bidders a degree of comfort that they haven’t overpaid.
In the case of Indiana, IFM was a hefty $US500 million or 9 per cent above the underbidder, two local counties backed by Bank of America Merrill Lynch, according to the lead counsel for the consortium.
The multiple is 32 times earnings before interest, tax, depreciation and amortisation. With an unusually long 66-year concession, the multiple is not comparable with other deals that have shorter terms of 25 or 30 years.
In an environment of low interest rates and high volatility in listed markets, IFM’s global infrastructure fund has been on a spree recently, also snapping up stakes in a Mexican toll road concession and in Vienna airport.
Himbury says the key is finding deals that are not necessarily in the public domain.
“You have got to get proactive in a low interest rate, low return environment and seek to identify unique, hopefully bilateral deals,” he says. That was the strategy behind the Vienna deal.
IFM has $22.9bn of its total $54bn in funds under management invested in infrastructure.
Its local infrastructure fund has returned 11.3 per cent net of fees since inception, a performance that helped it attract giant pension funds as investors. Its roll call of investors includes California State Teachers’ Retirement System, New York City Employees’ Retirement System, and state pension funds of Florida, Illinois and Arizona.
Himbury attributes this to IFM’s 20-year track record in infrastructure. Apart from Canadian and Australian investors, the sector has been neglected even by a pension fund industry that needs long-term returns to match long-term liabilities.
“A lot of the northern hemisphere pension fund investors have been late participants in investing in infrastructure,” he says.
After the weekend re-election of Mike Baird’s government in New South Wales, the state’s electricity poles and wires are likely to be the next large privatisation to come to market globally.
Himbury suspects the competition will be fierce, despite recent criticism that the election outcome in Queensland and the cancellation of the East West Link in Melbourne would raise sovereign risk issues for foreign investors eyeing future deals.
“Changes such as those can potentially impact sentiment, but my sense is that Australia net-net is seen to be a fairly attractive place to invest
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