Becoming a leader – Hastings Fund Management

PFI 500
11 min read
Asia

Hastings Funds Management (HFM) is rapidly becoming one of the world’s leading infrastructure investors, moving from listed funds and equity to setting up a US$1bn debt fund in Europe in the past few months. While it may not have the scale of the larger Australian, European and North American pension funds, its ability to adapt to changing circumstances in the infrastructure space has provided it with a competitive advantage. By John Arbouw.

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As at December 31, Hastings had A$8.3bn in funds under management, with just over A$500m of this allocated to debt. It has won infrastructure debt mandates valued at significantly more than this over the past 12 months. Hastings’ client allocation to infrastructure varies from 4% to 14% and it says this is indicative of the market. Allocations to infrastructure debt are in the vicinity of 1%+.

The company raised A$1.8bn in new funds last year and is overseeing the A$2bn sale of assets by ASX-listed Australian Infrastructure Fund to the Australian government’s Future Fund. It is also one of four consortia bidding for the Port of Botany and Port Kembla alongside the giant Ontario Teachers Pension Fund. This follows its successful A$2.3bn bid last year for the long-term lease on the Sydney desalination plant.

In the UK, Hastings was appointed as the fund manager for £750m from the RBS Group Pension Fund and will be looking for brownfield investments for RBS on both a debt and equity level in energy, ports and airports. Hastings has a track record in the UK and Europe with its airport fund AIX holding investments in the Athens, Dusseldorf and Hamburg airports, while its utilities fund UTA holds an interest in the UK’s South East Water.

The history of HFM mirrors the involvement of the private sector in funding Australian infrastructure. In 1994, former Australian Football League player Mike Fitzpatrick convinced investors that investing in infrastructure was not only viable but profitable. In 2005, Fitzpatrick sold his stake to Westpac, which continues to be the main shareholder to this day.

Around the same time, Transfield won the concession to build and run the Yan Yean water treatment plant in Melbourne, the country’s first ever PPP. What followed was a steady transition from public funding to private funding of infrastructure that has allowed HFM and others to become major players in the sector.

This gave rise to the listed infrastructure fund, a licence to print money according to market-watchers at the time. In 2012, the “Macquarie Model” of listed infrastructure funds passed its use-by date with the failure of the Cross CityTunnel, Lane Cove, BrisConnections and RiverCity Motorway as testimony that the licence has been well and truly revoked. Hastings is now in a transition phase as it moves out of the listed infrastructure asset model to direct investments both in Australia and offshore.

PFI asked Steve Rankine, executive director alternative debt, and Tim Cable, director infrastructure, what this transition means.

“We are exiting the listed business because we have listened to the market and realised that the investor base for listed funds is certainly in decline and has been for some years. Hastings’ listed funds have all outperformed their benchmark across all time periods since inception, so we exit knowing we have added real value for investors,” said Rankine.

Rankine joined Hastings in May 2008 and was located in London. He was responsible for Hastings’ operations in the UK and Europe. In 2011, he was appointed head of the infrastructure debt team and returned to Sydney in November that year. He said they were witnessing a period of global growth across the unlisted infrastructure market, “so it would appear that the assets that have been held within listed vehicles remain valuable, but for a different segment of the market”.

One of the other notable changes is the increasing inclination of funds of any kind to become more involved in debt rather than equity. So what has prompted this change? According to Rankine, institutions are much less developed on the debt side relative to infrastructure equity. However, Hastings has managed debt investments on behalf of its investors since 1999 so in that sense debt is not a new concept for institutional investors.

“While Australian institutions moved a little earlier on infrastructure debt [as was the trend in infrastructure equity], European, North American and selective Asian institutions are now moving quickly and we are seeing a lot of interest globally in infrastructure debt. Over the past 12 months we have seen evidence of increased interest and a handful of material infrastructure debt allocations made,” said Rankine.

“The change is principally due to a change in the bank regulatory environment [Basel III], higher bank funding costs [materially higher post-financial crises] and lower yields available from other fixed-income products like government bonds. Together, these make the risk-adjusted return of infrastructure senior debt compelling to institutional investors and hence we are seeing this product become part of the investing landscape. Importantly, the most significant driver, bank regulation, is a more permanent change and provides confidence of the persistence of the opportunity.”

Hastings is able to provide debt on longer tenors than banks normally want to do. Are there any tensions at this level in project deals?

“Hastings looks at opportunities across the tenor spectrum and it is often in those tenors greater than five years that there is particularly good value for investors given that banks are now much less willing to provide financing at longer tenors,” said Rankine.

“We do not see tension in this; in fact we see a good opportunity to work together with banks, which can continue to provide attractive shorter-dated liquidity and many of the other banking products and services alongside institutions that are better placed to provide longer-dated debt.”

If equity is no longer the main game, will there be enough interest from either institutional or retail investors to provide the scale of debt required to do larger deals?

“Hastings sees significant scale in this market and while it’s still early days, we think this has been evidenced by the funds raised to-date, including the mandate that we manage on behalf of the RBS Group Pension Fund,” said Rankine.

“We do see increasing evidence of institutional liquidity available for deals that we are following in the market. All in all we have a high degree of confidence in the opportunity for our investors and for our own business.”

Hastings partnered with Ontario Teachers to buy Sydney desal. Will we be seeing more of these alliance type deals?

“Given the size of asset deals such as Sydney desalination plant, it is logical that we will see further partnerships occurring in order to succeed in securing quality infrastructure assets,” said Rankine. “Not only do these partnerships bring together strengths across partners, they also assist each partner in alleviating risk while providing the financial strength to secure and manage the assets to obtain ongoing value for investors.

“We believe that exhibiting all the behaviours of a preferred partner is essential and as a manager with more than 19 years experience investing in infrastructure, we are fortunate to be in a position to partner with some large and influential industry participants.”

Where are the opportunities for Hastings in Asia-Pacific and Australia?

”We see ongoing opportunities in Australia in terms of asset sales and the growth of our portfolio of assets as they expand to meet market needs,” said Rankine. “However, many of our clients are at the upper end of their allocation to infrastructure and as a result, the expansion of our firm will look towards other geographies that are in the process of embracing infrastructure investing.

“We have recently expanded our teams in London and New York and will continue to do so. And we have been looking at Asia for some time, given the size and scope of opportunities occurring. Asia will certainly be a focus for us and we are finding that our long track record of successful infrastructure investing is assisting in the process of establishing the relationships required to be successful long-term,” said Rankine.

In London, Tim Cable is director of infrastructure and utilities. He joined Hastings in Q1 2012 and is responsible for capital-raising, origination and asset management. Cable has extensive financial services experience, having worked for Westpac for more than 13 years in a number of different roles and on numerous debt transactions

Hastings plans to exploit the weak European economy by lifting exposure to seaports, airports and motorways. Cable’s team consists of eight people and he has recently hired John Parker from Westpac. At the moment, there is a lot of interest in investing in infrastructure debt, with interest rates in Europe and the US low, and bond rates low. There is a whole pool of money that is looking for alternative investments, and infrastructure debt is one such option, he said.

Cable said his group was currently deploying the funds from the RBS mandate in both equity and debt. “We have recently undertaken investments in the UK. We have made one PFI transaction, an airport transaction, and will release details shortly of our recent water transaction,” he said.

With Hastings raising a US$1bn debt-specific fund in Europe, does the group ever see itself becoming a main lead arranger on deals?

“There does seem to be a move by some institutions to arrange deals but I believe that for the moment this remains the territory of the banking sector,” said Cable.

He believes the presence in Europe of Australian funds, and competitors such as IFM and others, is proving to be helpful in gaining acceptance among European investors and institutions that the funds from Down Under are in fact on top of the game.

Hastings expects the AIF asset sale process to take place in the next few months, with the company being delisted later in the year.

This will leave Hastings managing two Australian-based unlisted infrastructure funds, the A$3.3bn Utilities Trust of Australia (UTA), which raised a further A$700m last year, and the A$1bn Infrastructure Fund (TIF), as well as other funds it receives through investment mandates such as that from RBS. More significantly, the Hastings group, which was at the forefront of infrastructure investment in Australia, could have as much as 50% of its investments offshore in five years as it boosts its presence in London and New York.