www.hastingsinfra.com

Attracting and partnering with

offshore infrastructure investment

capital

Richard Hoskins, Executive Director

Hastings

August 2014

1. About Hastings

2. Capital supply

3. Views of foreign investors

4. Partnering issues

5. Conclusion

Contents

2

Section 1

About Hastings

3

Pioneering Infrastructure Specialist

4

• Investment approach designed to achieve

stable returns for investors

• Hasting infrastructure equity track

record1,5

Pre fees: 14.06% IRR and multiple of

2.09x

Net of fees: 12.5% IRR and multiple of

1.96x

• A$9.2 billion in funds under management1,2

• A$6.9 billion of capital employed and made more than 40 equity investments since inception1,3

• Currently holds interests in 17 portfolio companies, collectively managing 30 assets

• A$7.4 billion in distributions paid to investors since inception1,4

Note 1: All information to 30 June 2014.

Note 2: Funds under management includes committed but undrawn capital.

Note 3: Capital employed includes capital calls, initial public offerings, share purchase plans, institutional placements and the

reinvestment of distributions. Amounts include balances invested for separately managed accounts. Number of

investments does not include follow-on investments in the same asset.

Strong alignment

• More than 2/3 of the Investment Team own equity in Hastings under Long Term Incentive Plan

• Enhances retention of senior management and the investment team

• 20 years’ of experience

• Launched one of Australia’s first infrastructure funds in 1994

• 101 employees located in 6 offices around the world

• More than 70 institutional investors

• Network of industry relationships derived from a long history of infrastructure investing

Note 4: Distributions paid is for all funds and mandates, includes income and capital distributions paid or reinvested, returns of

capital and investor redemptions.

Past performance is no guarantee of future performance. Actual results may vary. Source: Hastings, 2014.

Note 5: Multiple Total is value / Total investment (including tax credits, post fees). IRR is partly based upon unrealised investments.

Section 2

Capital supply

5

Capital supply to infrastructure globally

• Unlisted infrastructure funds reaching final close in 2013 raised US$39bn across 49 funds:

– This is close to the amounts raised in 2007 and 20081

• Pension plan investors are forecasting material increase in allocations (39%) and only small decreases (9%)1

• Canadian pension plans continue to be strong outbound investors:

– Large direct investing teams with long track record investing in the sector

• US pension plans are increasing their allocations to infrastructure off a relatively low base

• European plans are also increasing their allocations:

– Strong European focus

– BUT larger pension plans and insurers are actively considering global opportunities

Note 1: Source Preqin 6

Capital supply to infrastructure globally (cont.)

• Increasing outbound investment from Asia:

– State Grid Corporation of China - acquired stakes in ElectraNet and SP Ausnet

– China Merchants Group - acquired 50% of Newcastle Port

– Samsung Life, KTCU and others – Victorian Desalination Plant

• Increasing trend towards direct investing and co-investments:

– Sovereign wealth funds

– Large pension plans

• Recent regulatory changes overseas have allowed new markets to invest in infrastructure and further

increased capital flows

• Broader acceptance of alternative investments:

– Government Pension Investment Fund (Japan) (US$1.1 trillion in assets) initial allocation has stimulated

Japanese demand

Note 1: Preqin

7

Drivers of allocations

• Greater acceptance of infrastructure as an asset class – now a distinct and important asset class

• Recognition for many defined benefit plans and retirement income products that their investment objectives

should be more closely linked to liability matching

• In a low interest rate environment, infrastructure is seen as a proxy for fixed interest but with higher returns

without increased risks

• Assets are becoming more readily available and accessible due to:

– Governments and private companies de-leveraging their balance sheets

– Growing requirements for private capital to fund the infrastructure deficit

– Closed-end funds exiting investments as they approach their end point

– Changed regulations and market conditions are encouraging divestments

• BUT there are emerging negative perceptions around:

– Amount of liquidity flowing into the sector

– Prices paid in recent transactions globally

8

Section 3

Views of foreign investors

9

Infrastructure as an Asset Class

10

Significant Upfront Investment in Fixed Assets

•Substantial capital investment is required to construct

the physical components of infrastructure assets.

Long Asset Lives

•Generally durable with a long useful life before requiring

replacement or significant refurbishment.

Embedded growth opportunities

•Often constructed with significant physical capacity to

allow for growth in demand and, in many cases, the

cost of capacity expansion can be a fraction of the

additional construction cost.

Strategic Competitive Advantage

•Often monopolistic or oligopolistic in character due to high

barriers to entry as a result of high construction costs, land

scarcity, environmental considerations, government

regulations and other restrictions.

Regulatory Oversight

•As essential services with significant market power,

both publicly and privately owned infrastructure assets

are often subject to some form of regulatory control.

Relatively Inelastic Demand

•The services provided are generally considered to be

‘essential services’ and, as a consequence, have limited or

no alternatives.

•Demand for these products or services is relatively stable,

often grows with underlying economic growth and is

relatively indifferent to pricing change.

Infrastructure assets are expected to display the following attractive characteristics

Perceptions of Australia by foreign investors

• Australia is a highly desirable investment destination:

– AAA rated soveriegn

– Relatively high interest rates

– Stable government with strong rule of law

– Liquid currency

• Australia is viewed as a proxy exposure to China and Asia:

– Growth potential without the country risk

• Geographic separation of large population centres translates into quality infrastructure investment

opportunities:

– Strong geographic monopolies

– Low substitution risk

• Opportunities largely arise from auction process rather than bilateral negotiations:

– Often highly competitive (although it only takes two bidders to be competitive)

– Relatively expensive to bid

– Often require multiple equity participants and significant debt capacity to finance purchase price

11

General attitude of foreign investors

• Building and protecting their reputation as responsible investors is important. Typically:

– Keen to engage with governments to present their credentials

– Want to be seen as long term investors with capacity and appetite to fund growth opportunities

• Investing in Australia is a relative proposition for foreign investors:

– No “home country” bias forcing them to invest in Australia

– Material opportunity cost to work in Australia due to distance and time zones

– Foreign investors will objectively assess risk adjusted returns compared to opportunities in other markets

– Level of competition for opportunities and expectations about market prices are very relevant

• Need well structured and appropriately priced transactions, efficiently executed by sellers

12

Section 4

Partnering issues

13

Role of local investors

• Local partners are seen as an important risk control:

– All politics is local – local partners bring networks and relationships

– Market experience – local partners have deeper understanding of market conditions and other factors that

influence investment performance

– Access to finance – local partners tend to have stronger relationships with domestic banks who are

generally important sources of funding for opportunities

• This limits the number of credible bidders for transactions as there are few local partners with capability to

lead complex bids

14

Governance

Three approaches:

1. Passive institutional investor – bring scale and competitive cost of equity

2. Active financial sponsor – bring global investment insight, financing relationships (eg, export credit

agencies), deep resources and comfort of a robust investment process

3. Strategic investor – bring operating and capital projects expertise

Common threads:

• Choosing their partner is important:

– Generally seeking long term relationships

– Identity of their partner and their investment approach is vital

• Often seek change of ownership and transfer protections

• Right to appoint directors and control decisions:

– Some expect to be equal largest investor

– Most want board seat entitlement as a minimum

– Many expect negative controls over key decisions

– Strategic investors often want simple majority control to put investment on balance sheet

• Prefer to build sticky relationships rather than re-invent relationships for each transaction

15

Foreign currency and tax

• Translating Australian dollar returns into a foreign currency is a key leakage of value:

– Australia is a high interest rate currency

– Leakage can be the biggest impediment to investing in Australia

• Foreign investors take different approaches to pricing this leakage:

– Some hedge back each investment and factor resultant leakage into investment analysis

– Others use an overlay at their portfolio level and consider adequacy of returns only on a local currency

basis

• Another key leakage of value is tax:

– Recent changes to thin capitalisation has disadvantaged foreign investors relative to local investors

– Many foreign investors cannot value franking credits

16

Consortium formation

17

Board composition

Requirements for simple majority control

Reserved matters

Conflicts of interest

Governance

Level of sector experience

Amount of knowledge of the asset being sold

Experience investing in Australia

Experience in similar bidding process

Existing or new relationship

Experience

Important considerations in forming a consortium with an offshore partner

Investment horizon

Approach to leverage

Distribution policy

Capacity to fund growth opportunities

Passive or active approach

Asset management

Team resources applied to the opportunity

Team capabilities and experience

Location of key decision makers

Internal approval process

Level of potential value-add

Resources

Return expectations

Investment philosophy

Impact of translating foreign currency and tax on their return expectations

Structuring requirements

Approach to bid costs

Investment mandate

18

Section 5

Conclusion

Conclusion

• No shortage of capital for appropriate opportunities:

– Trend is towards increasing allocations into infrastructure globally

• Strong domestic pipeline of opportunities

• Australia is a highly desirable investment destination:

– BUT cannot afford to be complacent

• Consortium formation requires careful analysis:

– Local partners are valued by offshore investors

– Governance, FX and tax are important issues to resolve upfront

Executive Director

Richard Hoskins

Richard has been with Hastings for over

seven years and has over 20 years of

relevant industry experience. Richard leads

Hastings Global Asset Management Team

and focuses on the delivery of investment

outcomes for each investment through

targeted asset management and specialist

input.

Richard is Chair of the Equity Investment Committee and

represents Hastings as a Director of many of Hastings’

portfolio investments, including Perth Airport, State Highway

130 5&6, Southwest Generation and Bonnyrigg Partnerships.

Previously while at Hastings, Richard led or co-led UTA,

Hastings’ largest fund, from 2006 to 2013. Recent investment

transactions in which Richard has been actively involved

include the acquisition of Phoenix Natural Gas, Sydney

Desalination Plant, Freeport LNG and Southwest Generation

and additional stakes in Melbourne Airport and Perth Airport.

richard.hoskins@hastingsinfra.com

+61 3 8650 3637

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Important Information and Disclaimer

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