The Exchanges

Q Yeah. How does the decision making work on the fund? Because when you think about a sovereign wealth fund and a CIO, there's CIOs, there's different ways of delegating responsibility. Now you have outside capital. So how does that play out?

A We have our own investment committee for global infrastructure. It has a majority of partners in the team on it, and it has two external members, one of which is the chair. We then have above that a trustee board, which is overseeing the products and the relevant sort of mandates that we run, and that has got on it people from the QIC board, and they oversee, if you like, Our adherence to all of the guidelines that we've said we would invest to. So it's, it is very empowering to, to the investment teams. At certain levels, there's this very strong oversight of reputation risk, which occurs with respect to the QIC board, but the QIC Global Infrastructure Investment Committee is, in essence, the key decision maker around investment decisions.

AI assessment note: “the QIC Global Infrastructure Investment Committee is, in essence, the key decision maker”

Q All right. How did you think about that strategy? A lot of people say, wow, that's highly concentrated.

A In some ways it is, in other ways it's not. So, first of all, three sectors we're trying to diversify across. Transport, so road, rail, airports, seaports, car parking, gas, electric, water, energy, and utilities, and then P-three, so the relevant private Public-private partnership models. So we've gone into some assets which have very diversified cash flows. So I'll give you an example, the Port of Brisbane, which is a landlord port, has multiple commodities, not just containers, but also coal, grain. So we built up, as best as we can, a diversified, uncorrelated set of assets, and that's sort of the ongoing objective that we had, is adding more direct investments by geography, diversified by sector, Diversified by assets life cycle as well, because life cycle risk in the duration that we're looking for in infrastructure is a real issue. You've got a capex cycle in all of the assets which you're looking to sort of manage. The approach we had was a very buy and hold approach. From scratch, zero waiting, they wanted to get to a certain level and obviously get that diversification over time.

AI assessment note: “In some ways it is, in other ways it's not.”

Q And the government side of that, do you end up having a competitive advantage in, call it Australia or Queensland assets, Because you can imagine the influence if US private equity firm or a Chinese government entity came in and wanted to buy a port, the sort of strategic asset dynamic. How does that play out in the deal dynamics?

A Look, it helps Ted, but the impetus on a privatization is it's got to be a public process in Australia at least, but the mindset that you come from being within a government provider at times has been helpful, not in every market. In Queensland, we are uniquely placed because we have a very active dialogue with the state, trying to sort of give them insight into how infrastructure is being financed elsewhere in the world, some innovation that's occurring, which hopefully can be applied for their benefit. So it, it has pros and it has cons, and we have affinity with certain types of other co-investors. So Asian investors, particularly, I think Have some regard for the, for the government heritage. Not in every market, however. So it does differ. It does differ.

AI assessment note: “Look, it helps Ted, but the impetus on a privatization is it's got to be”

Q And the KPIs, other than performance, what are the key metrics you look at for your team?

A So 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 origination as wide as possible within the context of what we've agreed are the relevant themes in a given year that we want to sort of hit. And, and where are we matching that to relationships? To drive those deals into our pipeline. So that's probably the first thing. The second thing is around asset management is having acquired something, have we moved through to plan in respect to the business that we put forward in terms of a business plan, and how have we executed on that in transition, and then how have we executed two years, three years, four years after we've acquired the asset. And then the third is really around How are we continuously improving as a business that we are active in post-mortem, what we don't and aren't successful on, what we've found as successes. We're certainly not precious. We don't think we're the best at everything. We're very keen to understand where someone has done something really innovative and wise in another asset that we observe, and so we want to try and capture that, and so that continuous improvement is also a way of Creating optionality and careers and pathways in our business, both in…

AI assessment note: “on the origination side, we're really driving how many things that we got in the pipeline”

Q And are those, do those buckets tend to be standard? I mean, at some level you look at it and say, oh, you're buying a port, you're buying an airport, you're buying a toll road. How do you differentiate between the assets that have viable long duration and others that might not?

A The first thing is we're really proponent of the sector approach, but people live and breathe a sector in our team. So They originate, they execute, they asset manage in the sector, so that means you're looking at a port in Australia, you're looking at a port in the US, you're looking at a port in Canada, you're comparing operating models, so that's very powerful. Around that, to your question is, what's the regulatory environment in that geography? What are the stakeholders amongst government regulators or customers that are really different? Some assets are networked, so airlines and shipping lines are an example that Parlay into ports and airports which are networked, but then many other assets, energy assets, in some instances are very local and regional. So then you've got to get in and under and understand what are those really local factors around that market which are going to affect, I suppose, the outcomes over a long duration. And then as you cross geography, you've got foreign exchange, you've got Political risk as well, which comes into play depending on emerging markets, developed markets, OECD, there's other constructs of regions around the world.

AI assessment note: “understand what are those really local factors around that market which are going to affect”

Q In the last Bunch of years, there's been more and more money in the hands of large private equity funds, whether participating in infrastructure or general private equity. What have you seen in the competitive environment for the assets that you're looking at?

A 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 yield has been sort of hard to find, and so they have become increasingly prevalent. We've seen larger funds Raise capital. There's been a lot of capital sort of raised in the asset class, and there's an ongoing segmentation occurring in the asset class as it matures as well. As people, very similar maybe perhaps to real estate where you had this division of, of the asset class, we're seeing that in, in infrastructure by geography or by sector, whether it's energy, transport, renewables, or whether it's by risk return, and so we're seeing increasingly People become more sophisticated in portfolio construction around an infrastructure allocation, and the pressure of that emerging with particularly more allocations, the supply side is not necessarily as constant as it might be in some other asset classes. In particular, countries would have more supply Because maybe more assets are privatized, more assets are willingly in, in a secondary market. So as I said before, some of these assets don't trade all that often, so then you have these large investors who deeply value that tier one core asset very highly, and are growing their …

AI assessment note: “we've seen a, like a large number of very big pension funds go direct.”

Q So the Brisbane asset is local, the Thames water assets in the UK. Do you decidedly try to invest more locally?

A We don't have that as an imperative, but the underlying liability profile of the fund, particularly the defined benefit fund, is a CPI plus Sort of liability that's growing, and so if we can get a CPI plus linked cash flow in Queensland, then we're directly offsetting for that particular pool of capital, you know, the liability with a great asset. Elsewhere, where we're managing capital outside of sources based in Queensland, they're looking for diversified, stable, predictable cash flows, and they like the inflation hedge, so we work to find that in particular assets. Now, not all infrastructure assets have that. In the revenue line, Or in a contracted asset, but that's what we, we look to endeavor to provide is a, a diversified set of those cash flows, particularly across the sectors and across the geographies.

AI assessment note: “We don't have that as an imperative, but the underlying liability profile”

Q How do you think about your objectives? So in a private equity transaction, Maximize IRR, whatever it is, multiple return on capital. In some of these particularly local assets, where there are broader constituents who's using the toll roads, the government agency, what's the core mission that you take on when you're buying one of these assets?

A The core mission is still to get stable, predictable returns from the allocations that are typically given to us in infrastructure. So, Relatively robust yield and ongoing steady capital gains. So from our point of view, the stakeholder group that I mentioned before around these assets is what you've got to be on top of. The service quality of the offering to customers, the ongoing investment in the asset. Health and safety of employees is a big aspect. Labor issues are very political around some of these assets. You've also got A desire to keep growing the asset in a relative sense to meet economic activity, and so being prudent about that investment and timely in expansion is, is obviously a sensitive issue for government. For regulators in Australia, there's a very strong centering on customer bills and, and the value equation that's delivered to, to the user. So whether it's a toll road, whether it's a Electricity distribution company. Those aspects are always coming into play.

AI assessment note: “The core mission is still to get stable, predictable returns”

Q And how about public debt? It's a subject that comes up quite a bit.

A So we see that as, as positive for private infrastructure investment, because the aging demographics, I think are going to affect a couple of things. Deaccumulation Of savings pools with respect to the baby boom generation, promote the type of asset class we're in, in terms of infrastructure, where yield and stable, predictable returns is going to be an attractor. We then also see significantly increasing healthcare costs, adding to that public debt, and therefore creating opportunity for private investment in infrastructure to go alongside government, and so increasingly we see government embracing Public private partnerships to work with, um, investors institutionally or strategic players to augment existing infrastructure. So that's an important aspect. The other aspect is whether, in fact, that will be a catalyst for what we've seen in Australia, which is this recycling of government assets, and whether, in fact, large public debt elsewhere around the world will actually invigorate governments to actually recycle infrastructure assets. And pay down that debt and use it to potentially reinvest in new infrastructure in time, but the nature of that public debt, I think, is probably a positive because government has been the largest funder of infrastructure historically.

AI assessment note: “we see that as, as positive for private infrastructure investment”

Q So let's just talk about one of these assets, the Port of Brisbane. You might think from the outside, well, you're in Brisbane, the sovereign wealth fund of Brisbane, don't you own the port already? How did that come about as a deal?

A So that deal was a privatization by the Queensland government. They had a program of assets, and this was an interesting privatization program. It had a railway, which got listed. It had forestry assets, which got sold in a public auction. The port of Brisbane was sold as an auction asset, and so we, we joined up in a consortium To bid for that asset, and we ended up being successful. The last asset in that program is actually really quite interesting, because it was a toll road company, which was not really in a shape to be sold. So what they did, which was quite innovative, was they vested the whole asset into the public pension fund, the defined benefit fund, as a contribution in kind, and we managed that asset and commercialized it, So it went in at, call it, three billion and change. We commercialized it. It was an asset which had no treasury function, no debt. It basically had a phone at the end of the CEO's desk where they swept cash into the state treasury, and so we literally, over a three-year period, were able to commercialize it, and then we added a couple of toll roads. 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 Fund because it basically meant that it…

AI assessment note: “So that deal was a privatization by the Queensland government.”

Q How do you think about the ownership of assets for the long term as compared to almost like a private equity? Like, okay, we're going to own the asset, fix it up, and then sell it.

A That example I gave on Queensland Motors was, was an exception. Most of the assets are really held For duration, and our challenge is getting alignment with management, having good governance in those assets, particularly, and then over time, driving value, whether it's through expansion of the asset, improved performance and operations of the asset, and that is really an increasingly active management exercise with the value chains that we see evolving in logistics, in energy, Particularly, we're seeing, you know, an emerging sort of decentralization of a system in electricity that was very centralized with the sort of emergence significantly of renewables, smart grids, and also battery storage. These are really quite important disruptors to the historical model. And so, from that point of view, we're, we're always looking to sort of renew the management because we had to sell Queensland motorways because it was a concentration issue. But in the main, we are looking to sort of build out the assets for the pools of capital we manage, and that has become probably a more active exercise now than it was in the beginning.

AI assessment note: “Most of the assets are really held For duration, and our challenge is getting alignment”

Q You know, it's a fascinating data set, because on the one hand, that makes a lot of sense. On the other hand, sometimes public markets lead economic activity. So how did you take what you're learning and try to figure out how you can develop lessons across the asset classes?

A So we have an exchange where we bring all the asset classes together, and there is an opportunity for people to sort of question. We have the CIO of the Defined benefit fund who's sort of got allocations into all of the strategies, and, and he's sort of a great cross-reference source for us, and so with his mindset, with his sort of investment objectives, I think we challenge internally quite well with a very close client, which is really very valuable, and then we're able to leverage that with other external money we manage, I suppose, and, and get their perspectives as well, so from that point of view, It's interesting, private equity, real estate, and infrastructure, those three have really worked in different paths and different cycles, and some sectors cross over, which are quite interesting, others don't, but in an exchange, it's like macro factor exchange, the input we get from our chief economist, who comes into that and puts a house view as a base view, which we all sort of leverage off. So While we're, we're allowed in our own asset classes to pursue our investment strategies, we have that opportunity to cross-fertilize and sound each other out.

AI assessment note: “we have an exchange where we bring all the asset classes together”

Q What are you preparing when you go into the meeting?

A I'm taking our pipeline, our sort of key macro factors that we are sort of shaping our investment plan for each year. So each year we, we sit down, we have a macro view on themes that are going to affect infrastructure, then we put that into basically a set of investment themes across the sectors, and then we have our sector teams build up from the bottom opportunities in each of those themes. And so I, I go to that meeting with those things In mind or a delegate from our team goes. And then we are sort of always looking to sort of try and test through some of the forward work of research, like where exactly there is relative value emerging in infrastructure. So we found it very valuable to test that sometimes in that forum and get a listed metric on something like that, like mobility as a service, for example, or the disruption that's occurring with renewables and, and energy storage. And just get a sounding from the private equity guys who might be seeing something going on in their manager set. And then in real estate, they're more like a direct player where their, their feed from retail malls is quite interesting and sort of potentially driving where economic activities emerging in Australia in different corridors. And similarly, they've got assets here in the US, so that helps a lot.

AI assessment note: “I'm taking our pipeline, our sort of key macro factors that we are sort of shaping”

Q And so if you look at it from when you joined in oh six to today, 12 years later, for a comparable asset, what's changed in the purchase multiples?

A The discount rates have come down. Let's say when we started mid-teen returns, equity IRRs were, 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. People In terms of the market cycle of being deeply attracted to it, it's been a safe refuge as well in terms of core yielding assets. So we've, we've found the cycle. We've had a tailwind. Real interest rates dropping over the last 15 years has been a significant tailwind. For infrastructure going forward, it'll be really interesting to see How performance shakes out in a rising interest rate environment, which will probably sort of be more meaningful in terms of showing where active management of the assets is.

AI assessment note: “The discount rates have come down. Let's say when we started mid-teen returns”

Q So as you look at the organization, and you've also worked at a private fund in the past, is the business activity The raising of capital, the servicing of outside clients similar, or is it different than it was when you're just at a fund management company?

A Well, I found the internal clients to be really even more hard on us, because they're just around the corner, and they set a very high bar in terms of expectations, and so that was a great grounding to going out and then talking to larger external clients. We, we had a good sense of it, but the rewarding factor is the public heritage is quite interesting from A duration perspective. It also opens interesting exchanges in infrastructure because there's a lot of assets that are tied up with government angles. As you can imagine, a lot of infrastructure is still in that domain, so having that heritage has been quite good in dealing with stakeholders around infrastructure assets, because 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, you intersect with those stakeholders regularly, and typically trip and fall in outcomes in the asset class is because you haven't managed one of those stakeholders very well.

AI assessment note: “I found the internal clients to be really even more hard on us”

Q And when it comes down to brass tax in terms of numbers, I know in the States, any of the public pension funds, the compensation is public. It tends to be very muted compared to the private market roles, similar functional roles in the private markets. What does that look like for you?

A Well, it's probably one of the things philosophically about running external capital. It provides a benchmark in terms of what those customers or clients want, and so we put that against the public clients. The public clients get a very attractive deal as a result of being able to run external capital, but the alignment model is a sensitive one, clearly, because there are a range of industries owned by government And funds management is a particularly different one in the context of their portfolio, and so it must be coming back to adding value to the asset liability mix where we're managing on their behalf, adding value into the state in terms of economic activity, investing in businesses, in infrastructure, and other asset classes we run, and then being a source of counsel, advice if required, To provide wider perspective on what's going on in some of the areas elsewhere in the world, which would be of interest and relevance to the government in the state of Queensland.

AI assessment note: “the alignment model is a sensitive one, clearly, because there are a range of”