May 21, 2018 · 56m · capital-allocators
Ross Israel - Stable, Predictable Cash Flows (EP.53)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Ross Israel, Head of Global Infrastructure at QIC, joins Ted Seides to discuss the construction and governance of QIC's infrastructure platform, the balance between sovereign and third-party capital, and operational strategies for generating stable, inflation-hedged yields across shifting macroeconomic cycles.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 24.5% of the talking time here. How this is scored →
Ted as informed peer 4.4 Guest teaching 5.0 Guest disagreement 0.0 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 12:55 Reframing portfolio concentration
In an entirely collaborative conversation, Ross gently pushes back against the premise that owning only 12 assets is merely concentrated risk, pointing out the diverse multi-commodity cash flows underneath each asset.
Hardest push from Ted ▶ 12:49 Challenging portfolio concentrationTed directly highlights that owning only 12 assets across a massive pool of capital strikes many outside observers as highly concentrated.
Biggest teaching moment ▶ 15:10 Masterclass on state asset recyclingRoss educates Ted on the financial mechanics of in-kind defined benefit transfers, explaining how commercializing an unrated toll road network repaired Queensland's balance sheet without an outright budget deficit.
Ted holds their own ▶ 47:15 Drilling into changing equity IRR return multiplesTed demonstrates sharp market knowledge by steering Ross into specific valuation multiple compressions and discount rate drift over the previous decade.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Ross Israel's Career Background and Path to QIC | 4 | 4 | 0 | 0 | Ted prompts Ross on his background and the transition from advisory to asset management. Ross shares details on early Australian utility listings and restructuring infrastructure assets. | |
| QIC's Structure and Mandate Evolution | 4 | 5 | 0 | 0 | Ted asks about Australia's compulsory superannuation structure and QIC's initial mandate. Ross explains the compulsory 9.25% savings pool dynamics and how QIC evolved from listed equities into unlisted alternatives. | |
| Building QIC's Infrastructure Portfolio | 5 | 5 | 0 | 0 | Ted questions the high concentration of holding only 12 direct assets across a multi-billion portfolio. Ross articulates how sector diversification and life-cycle risk management make concentrated infrastructure holdings resilient. | |
| Port of Brisbane and Queensland Motorways Transactions | 4 | 6 | 0 | 0 | Ted inquires about the mechanics of acquiring local state assets like the Port of Brisbane. Ross breaks down the innovative Queensland Motorways transaction, explaining how vesting an uncommercialized asset into a pension fund cured balance sheet deficits. | |
| Long-Term Ownership and Asset Characteristics | 5 | 5 | 0 | 0 | Ted probes on whether local bias exists and asks about Ross's most difficult deal. Ross recounts their investment in a Spanish ports concessionaire before the Global Financial Crisis, noting how traffic volume drop-offs served as an early macro signal. | |
| Cross-Asset Intelligence Sharing at QIC | 5 | 4 | 0 | 0 | Ted explores how intelligence is shared across public and private asset classes within QIC. Ross details their bi-monthly macro exchanges with the defined benefit CIO and chief economist. | |
| Strategic Rationale for Managing External Capital | 4 | 5 | 0 | 0 | Ted asks why a state-backed entity would take on external capital and manage outside clients. Ross explains how third-party capital benchmarks fees and discipline, while highlighting the unique stakeholder dynamics of infrastructure. | |
| Governance Structures and Strategy Pruning | 4 | 5 | 0 | 0 | Ted explores decision-making governance and how QIC prunes underperforming strategies. Ross outlines how their dedicated investment committee operates and why they exited listed equities and quant strategies. | |
| Compensation, Alignment, and Team KPIs | 4 | 5 | 0 | 0 | Ted asks how compensation and incentives work in a state-owned manager without equity options. Ross explains their performance-aligned carry mechanism and pipeline-focused origination KPIs. | |
| Investment Evaluation, Sector Focus, and Superannuation Influence | 5 | 5 | 0 | 0 | Ted inquires about deep sector evaluation and superannuation capital influence on domestic assets. Ross discusses airport privatizations and the virtuous circle of local member capital improving domestic infrastructure. | |
| Balancing Mission, Trade-offs, and Market Competition | 4 | 5 | 0 | 0 | Ted asks how trade-offs like labor negotiations are resolved alongside long-term return objectives. Ross explains why transparent stakeholder engagement is essential to prevent short-term gains from impairing long-duration asset values. | |
| Return Trajectories, Energy Disruption, and Public Debt Opportunities | 5 | 6 | 0 | 0 | Ted examines compressed IRR discount rates and emerging sector risks. Ross details energy grid decentralization through battery storage and how sovereign debt pressures create asset recycling opportunities. |
Statements from this episode (17)
Early Macquarie and Babcock & Brown Infrastructure Funds Unwound in Australia
“These funds all unwound in Australia, off the stable that was Macquarie, and then Babcock and Brown as well.”
Australia's Compulsory Superannuation System Is the World's Fourth Largest Savings Pool
“So that's created today the fourth largest savings pool in the world.”
QIC Outsourced Equities After Failing to Differentiate Internal Performance
“We realized that we could do alternatives well and differentiate performance, but conversely in equities we didn't, and so, so we outsource equities.”
QIC Allocates 5-10% to Infrastructure and 5-7% to Private Equity
“Today we're up around, to give you some idea, an allocation of between five and 10% of the total fund is in infrastructure, and similarly even probably higher weighted a little bit in terms of real estate And in PE, I think it's around the same five, five to s…”
QIC Doubled Queensland Motorways Value in Four Years to Fund State Pension
“It had two toll roads when we acquired it, And then we added three other toll roads that the city owned, and we built a network company. And then we sold it four years later for about a two times money multiplier, which was a great deal for the Defined Benefit…”
QIC Intends to Permanently Own Scarce Gateway Infrastructure Assets
“To be a permanent owner, and some of these assets are very scarce, they might not trade very often, and from that point of view, if you've got certain key assets, gateway airports, gateway ports, very strategic water assets, for instance, some of these things …”
Partner's Capital Constraints and Refusal to Dilute Stifled QIC's Port Deal
“That was, ah, so the lessons learnt, you know, we probably got the thesis right just before the GFC that, you know, there was going to be an opportunity, particularly in emerging markets, to add port concessions, and they did come up. Unfortunately, what happe…”
Private Toll Road Traffic Foreshadowed the GFC by Four Months
“We went back and looked at, you know, that profile of traffic, and it fell off About three to four months before the GFC, it actually fell off a cliff, and it's sort of one of those things that within our wider QIC business we're becoming more aware of is the …”
Public Utility Market Sentiment Guides Private Infrastructure Asset Sales
“It's interesting because I think the listed view is quite valuable in sentiment, and so often in talking with the CIO, my key question to him is, what's your sentiment right now? Because it gives some test of where exuberance is or isn't in some of the sectors…”
Infrastructure Underperformance Stems From Mismanaging Customers, Regulators, or Governments
“There are three stakeholders in infrastructure assets that keep emerging The first is obviously the customer of the asset. The second is regulators, and the third is government at a state, municipal, or federal level. You intersect with those stakeholders regu…”
Government-Owned QIC Incentivizes Teams With Carry Instead of Equity
“We can't offer stock because we're government owned. So the model we've gone down with is really around alignment with our underlying investors, and so it is through a carry structure that is aligned to the performance that we deliver to the client.”
QIC Evaluates Origination Teams on Pipeline Volume, Not Conversion Rates
“On the origination side, we're really driving how many things that we got in the pipeline. So it's not about conversion of X to Y. It's actually about getting to a certain level, a number of deals that we're putting into our pipeline and having that originatio…”
Privatized Australian Airports Are Primarily Owned by Superannuation Funds
“The airport sector, by way of example, which was privatized in the late nineties, early 2000, has really been owned largely institutionally by superannuation funds.”
Boosting Short-Term Infrastructure Returns Jeopardizes Asset Quality and Alignment
“The perspective is it's a long duration asset, and so you can dial up in the short-term returns, but you will have a consequence with respect to underspend if you look at the quality of the service or the quality of the assets and their maintenance, and so the…”
Large Pension Funds Are Internalizing Direct Infrastructure Investments for Yield
“Well, we've seen a, like a large number of very big pension funds go direct. There's an internalization that is occurring. They are attracted to the duration of the assets, the cash, yields that come off that, particularly in this point in the cycle where yiel…”
Core Infrastructure Equity IRRs Have Compressed From Mid-Teens to Single Digits
“Let's say when we started mid-teen returns, equity IRRs were sort of possible. That is well and truly drifted south in terms of the core assets. You know, some of the very core assets are single digit IRRs.”
Distributed Energy and Battery Storage Will Trigger the Uberization of Electricity
“Distributed energy, this convergence of renewables and battery storage is going to be a really big change. We, if I can summarize the opportunity, we've seen Uber where there's been excess capacity in the car fleet. The one place in infrastructure where there'…”