QIC – Act local and think global
Queensland Investment Corp (QIC), the investment management arm of the Queensland government has come a long way since it was first established in the early 1990s to handle the investments of the state government’s pension funds following the establishment of compulsory superannuation. By John Arbouw.
Today, it is a globally diversified alternative investment behemoth and its global infrastructure arm, headed by Ross Israel, is a leading player in infrastructure investment in Australia as well as the OECD. Israel co-founded the global infrastructure unit (QGIF) in 2006, provides overall leadership to the team and has oversight of all the team’s investments.
Ross is a member of the GI investment committee; the clients, investments and assets committee, and operating committee. As well as his global infrastructure responsibilities, Israel is a member of QIC’s executive committee.
He has more than 24 years of experience in the field of corporate finance and funds management, with specialist skills in infrastructure, capital raisings and M&A.
QIC itself is a global diversified alternative investment firm offering infrastructure, real estate, private capital, liquid strategies and multi-asset investments. It is one of the largest institutional investment managers in Australia, with A$79.5bn (US$57.6bn) in funds under management.
It has over 680 employees and serves more than 100 clients including governments, pension plans, sovereign wealth funds and insurers, spanning Australia, Europe, Asia, the Middle East and the US. Headquartered in Brisbane, Australia, QIC has offices in New York, San Francisco, Los Angeles, London, Sydney, and Melbourne.
The global infrastructure division of QIC is a long-term infrastructure investor with an established global platform. It currently manages A$9.5bn (US$6.9bn) across 12 global direct investments.
QGIF is an unlisted investment vehicle that seeks to provide institutional investors with access to attractive, risk-adjusted returns through long-term exposure to a diversified portfolio of global infrastructure assets. It has secured commitments from a range of institutional investors, including Hostplus, one of Australia’s largest superannuation funds, an Asian sovereign wealth fund and one of China’s leading insurers.
QIC mirrors the evolution of institutional fund management in Australia through conservative allocations of funds to infrastructure. The traditional go to areas of investment have always been fixed income and equities.
Its allocation of funds to infrastructure started at around 3% of the total group’s funds and slowly climbed to 5% then 8% and is currently at 10% of the group’s allocation.
“It is a journey that you can find in other defined super funds,” says Israel. “Infrastructure investment has now very much become its own asset class. With lower interest rates impacting on fixed income and the equities market remaining volatile, infrastructure investment returns has had a tailwind behind it.
“What you are also seeing is increased competition from pension funds from across the globe looking for asset sale deals. At the same time, government balance sheets are becoming tighter and they are not in the same position to fund large infrastructure as they once were.”
Israel says the large offshore funds certainly have the firepower to compete for deals in Australia but QGIF has been successful in its preferred focus on transport, energy and PPPs.
“We see the value chain in these areas continuing to evolve and requiring more active management. We see going forward that infrastructure investment management will be a key factor and we believe that we are well placed to do this,” he says.
The transition of infrastructure fund investment from the passive to the active is also a driver of the latest trend involving funds wanting to have management in-house rather than leaving this to outside managers.
“The move to internalise the investment management can bring both rewards and added risk. It will depend on the attitude of the government and the stakeholders on whether the balance between risk and reward is acceptable,” Israel says. “In the beginning we used outside managers but we no longer need this. We are now a 100% direct investor.”
For Israel and his team, the Queensland Motorway (QML) transaction was one of the biggest deals that they have done. QGIF bought the QML business from the government for A$3bn in 2011. Three years later it sold the business to Transurban for more than A$7bn.
QML is responsible for managing a 70km network of toll roads, bridges and infrastructure, which have expanded to include the Gateway and Logan motorways, Brisbane’s Go-Between Bridge, the Clem7 tunnel, and the Legacy Way motorway.
“When we bought the QML business we actively managed the asset to bring greater value and returns,” Israel says. “We also acquired another three toll roads to add to the QML portfolio. We also improved the tolling system to reduce bad debts and toll evasion. This bulked up the asset for the eventual sale to Transurban.”
For QGIF, the big deal going forward is the estimated US$4.3bn Cross River project. The project is split into two parts. The Tunnel, Stations and Development (TSD) package covers the main construction works, and will be delivered as a PPP. The Rail, Integration & Systems (RIS) package covers the rail systems and surface projects and will be delivered as an alliance agreement.
In September, the government received more than 12 expressions of interest in the project. Further progress on the project was temporarily halted due to the Queensland state election. The incumbent government was re-elected earlier this month and further announcements could be made before the end of the month.
“The current government is committed to presenting the Cross River Rail project as a PPP and we expect the procurement process to begin before the end of the year. It is an important project for Brisbane and its ability to connect inner city suburbs,” Israel says.
“We have done a number of PPP projects and we will certainly look at this project. We would look to join a consortium as an equity investor in the project.”
As for the often mooted possibility that Queensland will start selling government assets such as its power companies to reduce debt, Israel believes that this is not going to happen any time soon.
“Queensland will need new infrastructure to spur economic growth and there will be opportunities for the private sector to partner with the government to deliver this in innovative ways but privatisation of assets is not on the table,” he says.
One of the other big deals for QGIF going forward is the sale by the New South Wales government of its 51% interest in the massive WestConnex project. Expressions of interest were submitted in November and consortia are now forming to make indicative bids early next year.
“We are certainly interested in this project and we are currently trying to get our heads around the various risks. It is a strategic project in a corridor that is a high growth area on the eastern seaboard,” says Israel. “However, at this stage we have not joined any bidding consortium.”
While QGIF has invested equity in infrastructure, the group has so far resisted any temptation to establish a debt portfolio, which now seems to be a regular part of many super funds.
“We did some subordinated debt just after the global financial crisis and this was very profitable for us, but we will remain equity investors for the time being,” Israel says. “One of the reasons is that there are conflict of interest issues emerging if a fund does both debt and equity.
“However, when we acquire an asset, we do get involved in refinancing in the capital markets and the USPP market. We have also fostered strong relationships with lenders and banks.”
There is no doubt that QGIF has become a significant player in the infrastructure space. Some of its notable investments include 40% ownership of the Port of Melbourne, which was privatised by the Victorian government last year and was won in a hard-fought bidding duel with fund manager IFM Investors.
QGIF owns 100% of Lochard Energy, which runs the Iona gas plant in Victoria and has stakes in the Port of Brisbane and Brisbane Airport, and it owns 100% of Adelaide-based Epic Energy.
Globally, it owns 40% of the Long Beach Court House PPP in California, 100% of the student housing project at Ohio State University, 19.6% of the Canadian Medical Research Centre in Montreal, 58% of New Zealand power company, PowerCo and 8.7% of Thames Water in London.
As a sign of the times, QGIF has partnered with AGL to establish the Powering Australian Renewables Fund (PARF). In July 2016, it became an equity partner alongside AGL in the A$2bn–$3bn fund. AGL provided A$200m in cornerstone equity and QGIF provided A$800m. The balance of funding will be debt raised at a project-by-project level.
In November 2016, AGL announced on behalf of the PARF that it had reached financial close on selling its 102MW Nyngan and 53MW Broken Hill solar plants to the fund. In January 2017, AGL announced it had reached financial close on the sale of the 200MW Silverton Wind Farm project in western New South Wales.
In August 2017, AGL announced it had reached financial close on the sale to PARF of the 453MW Coopers Gap Wind Farm project at Cooranga North, approximately 250 kilometres north-west of Brisbane. The project will be the largest wind farm in Australia on completion.
The total development investment associated with the Coopers Gap project will be approximately A$850m (US$675m), funded through a combination of PARF partners’ equity and a lending group comprising Westpac, SMBC, MUFG, Societe Generale, DBS Bank, Mizuho and ABN AMRO. The five-year loan portion is about A$500m.
“Renewables is a very important sector which is going to continue to disrupt the energy value chain. With costs coming down and reaching price parity with generation power, the development of storage will only add to this disruption,” says Israel.
”The decentralisation of the national energy grid coupled with more innovative subsidy support is telling us that renewables is a very dynamic part of the energy market. It is certainly going to be far more different going forward than what it has been in the past. Renewables has a tail wind behind it as the country moves away from coal-fired power stations and this will only continue over the next five to 10 years,” he says.
“The interest will be on the state of the market post-2020 when the Renewable Energy Target runs out. The projects that have long-term PPAs will be better-positioned than those projects that have opted to sell power into the grid on a merchant basis.”
QGIF’s original funding came from the defined pension funds run by the government but earlier this year it branched out by establishing an infrastructure fund and seeking investments from other funds and institutional investors. The fund reached a close last March achieving a total of A$2.35bn (US$1.79bn) of capital commitments over an 18-month period. The original target was A$1.75bn.
The fund is a pooled unlisted investment vehicle that provides institutional investors with access to risk-adjusted returns through long-term exposure to a diversified portfolio of global infrastructure assets. Around 35% of the fund is already invested in projects such as the Port of Melbourne.
For Israel and the QGIF, the infrastructure pipeline both in Australia and OECD countries will continue to provide opportunities.
“We are trying to find assets where there is an opportunity to add value. Globally, we would look at distributed energy and airport deals. We also like the PPP space. In the US we see individual states embrace PPPs and there are also opportunities in telco towers. Data centres and data storage also provide opportunities,” says Israel.
“In Australia, there are going to be less government privatisations. The Inland Rail project and the Western Sydney Airport are deals that the Federal government is supporting and we will look at them. We also see storage and renewables as an interesting space.”
QIC is somewhat unusual in that it is a standalone manager of state government pension funds while other jurisdictions such as NSW have allocated this function to their Treasury Corps. But when your infrastructure division can turn a A$3bn investment into A$7bn in the space of three years as it did with Queensland Motorways, it is hard to argue with success.