By James Thomson
It’s no surprise that Australia’s energy transition emerged as one of the biggest opportunities for investors at The Australian Financial Review Infrastructure Summit on Monday in Sydney.
But it was a shock to hear how three of our largest influential investors – Brookfield Asset Management, Global Investment Partners and AustralianSuper – have struggled to find a way to invest in the country’s renewable energy boom.
And it’s not for want of trying.
“I’ve been at it for 30 years and we have very little to show for it in terms of renewables investment,” Stuart Upson, chief executive of Brookfield’s Asia Pacific business, told the Summit.
It’s a similar story for Rob Stewart, GIP’s managing partner in Australia and AusSuper’s head of infrastructure, Nik Kemp, who revealed all the industry fund’s investments are offshore.
Partly this reflects Australia’s struggle to settle on climate policy, which has led these global investors to look towards other nations where the policy settings have been clearer.
But the biggest hurdle for these three giants is more simple: the returns simply aren’t there.
Despite Australia’s previous policy settings, Kemp says the sheer amount of capital being poured into Australia’s renewable sector has essentially seen returns competed down to levels that are unattractive.
Stewart agrees. “For us, it’s always about risk and reward. It’s as simple as that – we’re agnostic as to where in the world we invest in and what those opportunities are. We care about scale and a few other things, but really we’re about risk and reward.”
To be clear, Australia has been a net beneficiary of this surplus of capital. But the willingness of investors to accept what Brookfield, GIP and AusSuper consider inadequate returns has made Australia’s renewable energy sector too expensive for the trio.
This may be starting to change; Upson, who is looking to invest $20 billion in renewable projects over the next seven years as part of the $18.4 billion takeover, says the environment is starting to turn Brookfield’s way. He says investors who have taken a rates-plus approach (accepting returns at margin above the prevailing interest rate) are being forced to adjust as interest rates rise, while Brookfield is now starting to see the sorts of returns it wants under its absolute return approach.
The risk equation is also shifting thanks to the federal government’s legislated emissions reduction target, which the trio welcomed.
Beyond renewables, there is no shortage of opportunities for investors to chase. Wilson Asset Management portfolio manager Dania Zinurova says areas like energy storage are becoming increasingly attractive, while GIP, which invested in a range of LNG infrastructure projects last year, including Woodside’s Pluto train, remains confident in the strategic role LNG has to play in the energy transition.
Bank of America’s local chief executive, Joe Fayyad, sees plenty of opportunities in the energy transition, but there’s another part of the infrastructure market he expects will remain hot: digital assets.
He told the Summit the last 18 months has seen $15 billion of deals in this area, including telco tower sales by Telstra, Optus TPG, Spark and Vodafone New Zealand. Deals in the fibre sector have also been prominent, including involving Vocus and Uniti.
Fayyad says there’s more to come. Not only do these assets offer defensive cashflows, but the growth in digitisation during COVID means demand is rising, too.
But Fayyad warns that with rates still rising and the outlook for inflation uncertain, the lower volumes of deals we’ve seen in 2022 may continue.
“There is a lot of uncertainty out there and I think that’s caused a lot of dislocation both in financing markets, as well as just around the board table.”
He says boards are having a tough time answering a simple question: what is our business actually worth?
“Effectively we’ve seen in M&A vendors saying, ‘well, I want yesterday’s price’ and buyers saying ‘well, I want tomorrow’s price’ and you’ve got this big valuation gap that’s emerged, which is really slowing us down. It’s making it a lot more challenging for assets to be priced.”
But infrastructure may bounce back faster than some other sectors. Not only is it a frequent target for large private capital investors, but it’s typically easier to arrange funding for infrastructure deals given the stable cashflows these assets offer.
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