Hastings Funds Management, the infrastructure boutique that Australian banking owner Westpac Group has struggled to find a buyer for over the past two years, is on a knife's edge following a vote of no confidence by a key client, market watchers say.
The Aug. 31 decision by unitholders of The Infrastructure Fund — an open-end fund with A$2.1 billion ($1.7 billion) of stakes in Australian airports, transmission grids, ports and roads — to replace Hastings as its manager over the coming year has boosted the potential costs of further delays in dispelling the cloud of organizational uncertainties that's hung over the firm in recent years, say sources familiar with the sales process, who declined to be named.
Concerns about Hastings' ownership and lack of strategic direction prompted TIF's trustee, Gardior Pty Ltd., to launch a review of The Infrastructure Fund's management structure late last year which concluded with the recent unitholder vote, said Jonathan van Rooyen, general manager-investments, with Gardior in an interview. Before joining Gardior in late 2016, Mr. van Rooyen served as an executive director with Hastings and the firm's portfolio manager for The Infrastructure Fund.
People familiar with the sales process said Westpac's inability to close a deal with potential buyers, such as TIAA-CREF and MassMutual Financial Group last year, and more recently Sydney-based real estate investment boutique Charter Hall Group, reflected disagreements — marked by "gamesmanship and brinksmanship," according to one — about the fundamental value of the Hastings franchise. The loss of key professionals along the way aggravated the process, they said.
Recent high profile departures included Peter Taylor, Hasting's global head of global investments and asset management, who left the firm in March 2016 to help lead The Carlyle Group LP's infrastructure efforts as co-head of the Carlyle Global Infrastructure Opportunity Fund, and Robert Collins, Hastings' head of global investments in North America and Europe, who left in March 2017 to lead 3i Group plc's efforts to launch a North American infrastructure business.
Meanwhile, people familiar with the infrastructure boutique say Andrew Day, Hastings' CEO for the past six years, is set to leave the firm over the coming month. Neither Mr. Day nor Hastings spokeswoman Lina Wynn responded to emails seeking comment.
In the wake of the TIF decision, observers predict either the Melbourne-based manager of A$14.3 billion in infrastructure assets — including TIF's A$2.1 billion — will succeed in securing a new owner capable of reassuring clients and inspiring its investment professionals or the firm will risk losing big chunks of its assets, as well as talent, to competitors.
Westpac bought a 51% stake in Hastings in 2002 and the remaining stake in 2005. The move to sell Hastings is in line with those of many Australian financial groups, which have looked to bolster capital by selling non-core businesses.
At a time when institutional investors around the globe are looking to raise allocations to infrastructure, settling the ownership question would remove one hurdle for asset owners considering Hastings, analysts say.
Something has to be done to resolve the uncertainty weighing on the Hastings organization now, said Ray King, investment consultant and founder of Melbourne-based Sovereign Investment Research.
"The right party is someone (with) the confidence of the clients" — perhaps another infrastructure player or a large private equity manager — who can "come in and settle it down," he added.
A Hastings news release Aug. 31 acknowledged the recent decision by the fund's unitholders to move on, but described the loss as a flesh wound rather than something crippling.
Less than half
TIF's assets account for less than 15% of Hastings' total revenues, while the firm's launch of an infrastructure debt business over the past five years and its efforts to add clients in Europe, North America and Asia helped it secure A$1.8 billion in commitments over the past year. That's roughly equal to the scale of TIF assets it could lose, the news release said.
Over the past 17 years, Hastings has delivered annualized returns of 12.8% for TIF, the firm said.
Still, the rare dismissal of a manager by unitholders — the first one market veterans could recall since November 2008, when Sydney-based Allegro Funds Pty. Ltd. was installed to replace ABN AMRO Capital as manager of a A$300 million private equity fund — could pose further perils for Hastings. Two-fifths of the firm's assets under management reside within another open-end fund, the A$6 billion Utilities Trust of Australia.
Rob Jolly, the chairman of UTA's board, didn't respond immediately when asked, in an email, whether the board might follow TIF's example in launching a review of the management of its fund.
Some observers pointed to TIF's 12-month time frame for replacing Hastings as evidence the long-time client could simply be looking to pressure Westpac to push ahead quickly with a sale to a strong buyer capable of stabilizing Hastings and reviving its growth. If such a buyer could be found, Hastings "might be able to get TIF back," said one.
Gardior's Mr. van Rooyen said TIF unitholders will decide over the coming year whether to appoint an external manager or pursue "a hybrid model" combining a strong internal team with external managers appointed on a case-by-case basis.
While declining to rule out the possibility that Hastings could continue to manage the fund, Mr. van Rooyen said such an outcome would only be an option for unitholders if the firm secures a strong, stable owner.
The longer the process drags on, the greater the chance that potential buyers may look beyond negotiating with Westpac and instead try to secure the bulk of Hastings' assets by winning the UTA's mandate, observers say.
With many of Hastings' investments in airports, roads and transmission grids made in club deals alongside other big investment firms, one consultant, who declined to be named, warned that a competitor — rather than acquiring Hastings — could simply bid to replace that firm as manager of the more than 50% of its assets ensconced in the two big open-end funds.
While nothing as formal as an auction is taking place now, a number of interested parties continue to talk with the bank, according to sources familiar with Westpac's sales efforts over the past two years.
Emma Irvine, a Sydney-based spokeswoman for Westpac Institutional Bank, said: "Westpac continues to assess sale options and remains committed to Hastings' clients and the business." She declined further comment.