Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Atlas Arteria shareholders hold out for a hero
Australia’s listed infrastructure universe is disappearing beneath the tidal wave of capital dispensed by investors like IFM and the super funds that own it. The starting gun has been fired for one of the most significant periods of privatization in recent history, and IFM’s attention has now settled on listed toll road operator Atlas Arteria.
Atlas has done significant work in simplifying its business by internalizing the management structure – it had previously been managed externally by Macquarie Fund Advisers – and acquiring some minority assets that “they’ve then brought up to 100 per cent” in a move that’s made it easier to take the company private.
Add to that the roughly $400 billion of unlisted dry powder around the world looking for a home – unlisted investors are coming into listed markets and paying a 30-40 per cent premium to where they’re currently trading – and Shane Hurst, managing director and senior portfolio manager at ClearBridge, isn’t overly surprised to see a bid.
“There’s so much unlisted capital waiting to invest; it’s burning a hole in their pocket and they need to spend it, because the longer they hold it the more their investors aren’t particularly happy to get limited return for their capital,” Hurst said.
At the time of writing, Atlas had knocked back a request from IFM for non-public information, but Hurst expects that the process will soon become more competitive.
“Our view is that they’ll probably open up a data room and do a formal bid process, just to extract the greatest value for shareholders… IFM will be one party of possibly many others who want to buy the asset,” Hurst said. “That points to a higher bid, either from IFM or other parties. The only caveat is that they own 15 per cent of the register and so a blocking state.”
IFM built that stake through a mix of swaps and physical shares purchased through a Cayman Islands-domiciled entity, and will be part of a transaction either way. Worst case, somebody else comes in with a much higher bid and they make a quick return on their capital; best case, they walk away with the whole thing and take it private at a “lowish bid price.”
IFM is reportedly happy to just sit on the registry, but Hurst believes that Canadian pension funds, large US banks, or international private equity consortia could also get involved, and that the bid will ultimately settle somewhere between $8.10 – the current share price – and $9. Atlas forms one of the larger weights in ClearBridge’s RARE Infrastructure Income fund at 4.3 per cent, at an average entry price of around $5-$6. It’s now trading above $8. For ClearBridge, it’s all upside.
It’s another segment of the Australian listed infrastructure universe likely disappearing forever, but ClearBridge and other shareholders aren’t particularly bothered (Hurst says ClearBridge “isn’t parochial”). That’s a stark difference to IFM’s most recent adventure in listed infrastructure: the monster acquisition of Sydney Airport alongside a consortium of super and pension funds, which saw the share registry grow increasingly noisy due to perceived failings of the board to extract value through a more competitive bidding process.
A more competitive bidding process likely wasn’t possible; regulations on foreign ownership of key infrastructure would have prevented a bevy of offshore investors from splurging on the asset, and the other obvious bidder – which was rumoured, at the time, to be borderline interested – had already owned it. It’s easier to get a competitive bidding process for Atlas because 90 per cent of its value comes from a French toll road network, and the rest comes from US toll road assets. It’s also substantially cheaper, with IFM’s bid valuing it at around $8 billion, including debt.
