Is buy and hold the best strategy?
5 APR 2014 TONY BOYD AFR
If you live in a $1 million house and someone offers you $10 million in cash to sell, you would be dumb not to take the money.
You would think the same logic would apply in our sophisticated financial markets but that is not always the case.
The dumb behaviour described above is happening in infrastructure, which Chanticleer would argue is the hottest asset class in Australia.
But the market is not operating along the lines you would expect when asset prices soar to stratospheric levels.
In fact, the infrastructure market in Australia is characterised by weird distortions caused by the wrong incentives.
This is relevant to millions of Australians because the bulk of the assets that should be coming into the secondary market are owned by superannuation funds. But they have disincentives to sell because of fee structures tied to funds under management which were put in place on the advice of powerful asset consultants.
LITTLE OR NO TRANSPARENCY
Owners of infrastructure assets benefit from rising asset values which, in many cases, are rising based on the valuations of accountants. Often there is little or no transparency about these valuation uplifts.
While this has created the perfect environment for state governments to sell infrastructure assets, members of super funds could well ask if their interests are being served by the current mantra to “buy and hold” infrastructure assets in perpetuity.
To get an idea of the heat in the market take a look at what is happening in Brisbane where there is an auction for Queensland Motorways Ltd.
This company, which is owned by the state’s defined benefit pension fund, manages a 70 kilometre network of tolled roads, bridges and tunnels in and around Brisbane. Given the shortage of infrastructure assets up for sale in Australia it is not surprising that four different groups are queuing up to buy QML. But it says a lot about the liquidity flowing around the world’s capital markets that each bid is fully funded in terms of debt and equity.
Considering the QML price tag is somewhere between $6 billion and $6.5 billion, we are talking about funds available from local and international super funds, pension funds, sovereign wealth funds and banks of up to $26 billion.
The four QML bidders are: the Transurban consortium, which includes Australian Super and Abu Dhabi Investment Authority; IFM Investors, which is back by the Government of Singapore Investment Corporation; Borealis Infrastructure, which is a Canadian pension fund; Spanish toll road operator Abertis, which is backed by Hastings Funds Management, Kuwait Investment Authority and a Dutch fund call APG Group; and the Malaysian sovereign wealth fund Khazanah Nasional Berhad.
Further evidence of the heat in the infrastructure market came in November last year when a Canadian Pension fund bought a stake in the Port of Brisbane for $1.4 billion.
This valued the asset at about $6.2 billion or about 28 times earnings.
A similar stratospheric price was paid in May last year when the NSW government sold Port of Botany and Port Kembla for $5.1 billion or about 25 times earnings.
Prior to these two transactions, ports used to sell for about 12 to 15 times earnings.
The most telling aspect of the Port of Brisbane transaction was the identity of the seller of the 26.7 per cent stake, the New York-based Global Infrastructure Partners (GIP).
This company had a big incentive to sell because its fee was based on what the world of private equity calls the carry. It got paid a performance fee of about 20 per cent of the capital gain above an 8 per cent hurdle rate of return.
GIP DID EXTRAORDINARILY WELL
GIP did extraordinarily well out of the transaction, but so did its clients.
However, its actions in getting out of the Port of Brisbane served to highlight the lack of action by those left behind.
Other shareholders in the asset were IFM Investors, Queensland Investment Corp and Abu Dhabi Investment Authority.
Australia’s super funds used to have the carry performance system but it was beaten out of the market by powerful asset consultants.
The asset consultants preferred a low base fee and a big transaction fee, which provided an incentive for the consultant to find a buyer for an asset and an incentive for the asset owner to buy and hold.
The Australian infrastructure market is currently the classic seller’s market.
VIRTUALLY NO SECONDARY MARKET
There is virtually no secondary market for assets. Compare that to the private equity market in Australia, which is constantly turning over assets from private ownership to equity capital market ownership and vice versa.
The private equity fee model is the same as for GIP. The manager is allowed to participate in the capital gain earned on the sale, which is known as the carry.
Members of super funds should be asking whether or not it is in their interests to have their funds buy assets and hold them forever.
Is the buy and hold strategy in their interests or is it simply the result of fee incentives that encourage funds to ignore the blatant opportunities to take profits?
Original Article here