Infrastructure, property boutiques join to undertake new investments overseas
The Australian superannuation funds that launched infrastructure and domestic property investment boutiques more than 20 years ago are moving to extend that ownership model to a new venture focused on overseas property.
On April 26, IFM Investors, an infrastructure-focused manager owned by 27 super funds, and Industry Super Property Trust, an Australian property manager owned by 31 funds, announced a 50-50 joint venture to invest in international property.
Analysts say the ownership structure of the joint venture — to be called International Property Funds Management when it launches in the third quarter — should boost its prospects of success.
"I think the model is highly attractive and a great compromise" between bringing management of assets in-house — as a number of the biggest super funds in Australia are doing now — and hiring external managers, said Josef Pilger, Sydney-based global pension and retirement leader with Ernst & Young Global Ltd.
Ownership by super funds is likely to give IPFM an advantage, provided it can prove itself to be a best-of-breed manager, "much like IFM has done in the unlisted infrastructure space," agreed Sandhya Chand, managing director with Sydney-based money management industry consultant Peter Lee Associates Pty Ltd.
Tony McCormack, the former head of capital transactions at Industry Super Property Trust who's been named CEO of the new venture, said in an interview that the new entity's "not-for-profit" ownership structure will allow the firm to offer clients a highly competitive fee structure and a culture focused on meeting their needs.
That could come in handy in an Australian market where lowering money manager fees has been a blood sport in recent years.
There's no doubt that the market environment is "materially different from even a decade ago," with the level of competition for specialist asset managers arguably at an all-time high, and competition from internal super fund investment teams adding to heightening fee pressures, said Ms. Chand.
Even so, a number of the venture's super fund owners are not building internal teams at present so there's likely to be "reasonable demand" for IPFM's capabilities, she said.
AustralianSuper, the country's biggest industry fund with A$120 billion in assets and among the initial handful of super fund owners of IFM and ISPT, has been one of the most aggressive in boosting in-house management in recent years.
The evolution of the fast-growing fund's allocations to IFM and ISPT in recent years show, at once, both the headwinds those boutiques could face as more of their owners grow big enough to consider in-house management, as well as the resilience of their ties with those clients. (IFM has A$105 billion ($78.3 billion) in assets under management and ISPT, A$15 billion in AUM.)
At the June 2017 close of the most recent fiscal year, IFM was managing A$6.3 billion in infrastructure mandates for AustralianSuper, up from A$4.7 billion three years before, even as its share of AustralianSuper's total infrastructure allocation was falling to 49% from 68%.
Over the same span, ISPT saw the domestic property assets it managed for AustralianSuper climb to A$3.9 billion from A$3.1 billion, even as its share of the fund's total property allocation was dropping to 39% from 53%.
The super fund's internally managed infrastructure allocation, meanwhile, doubled to 44% from 22% over that three-year period, while the portion of its domestic property assets managed internally surged to 38% from 15%.
Even if more super funds are becoming big enough to make the economies of scale the earlier generation of funds sought by setting up IFM and ISPT less of a draw, other charms of super fund ownership are coming to the fore.
Strong performance and better value for money on the back of lower fees have contributed to the long-term growth of IFM and ISPT, but the increasing focus of asset owners globally on achieving better alignment of interests with managers is going to prove a considerable positive for the new venture, said Brett Himbury, the chief executive of IFM Investors, in an interview.
Mr. McCormack said IPFM will manage money for its owners at first but eventually look to serve third-party clients as well, leveraging IFM's six overseas offices.
If super fund ownership brings advantages, IPFM still has to perform if it hopes to benefit from them, analysts say.
"At the end of the day, it will all come down to execution," the capabilities of the teams they bring in, and how the firm is structured and governed, said Craig Cummins, Sydney-based partner, financial services, national superannuation leader, with PricewaterhouseCoopers.
Starting to build teams
Mr. McCormack said the task of building teams for various markets has just begun, but his first hires have included Tim Stringer, who left his role as principal senior consultant, real estate, with investment consulting firm Frontier Advisors to take IPFM's chief investment officer role.
Peter Lee's Ms. Chand said her firm's recent survey of more than 100 super funds in Australia showed one in four saying they will hire a new manager for unlisted property over the coming year, with broad interest in U.S. as well as U.K. and European property.
Mr. Cummins warned strong asset owner interest in international real estate now could prove a two-edged sword. With "a lot of money flowing in," money managers in the market segment are "doing really well," but that broad pickup in interest could inflate prices, limiting the number of opportunities to be had, he said.
IFM's Mr. Himbury said super fund owners can be expected to conduct thorough due diligence of the new firm to get comfortable with its abilities, systems and processes. All of those aspects will need to be competitive before those owners commit capital to the firm, he said. "However, if your alignment is clear and authentic, there may be increased likelihood investors (will be) prepared to support earlier rather than later," he said.