Infrastructure fund: Colonial First State Global in $3.1bn pitch to investors

Colonial First State Global Asset Management is sounding out investor appetite for a $3.1bn fund.

Infrastructure is an important part of the business’s growth strategy

Commonwealth Bank’s asset manager, Colonial First State Global Asset Management, is sounding investor appetite for a €2 billion ($3.1bn) global infrastructure fund.

As infrastructure’s investment fundamentals start to shift after the first increase in US interest rates since 2008, CFSGAM’s ­global head of unlisted infrastructure Perry Clausen confirmed plans for a second European ­Diversified Infrastructure Fund.

“EDIF 2 is now under consideration and we are sounding out the market with current EDIF investors and prospective EDIF 2 investors,” Mr Clausen said.

“As EDIF 1 reached its hard cap of €2bn, exceeding its target fund size of €1.5bn, we are ­contemplating EDIF 2 in the 2016 financial year with a target fund size of €2bn.”

CFSGAM manages almost $200bn on behalf of institutional investors, pension funds and their clients worldwide.

Infrastructure is an important part of the business’s growth strategy, with investors attracted to its predictable, long-term ­income and capital appreciation.

Relative returns from EDIF 1 have also been enhanced by its focus on European mid-market companies, where the competition for assets is less intense than for mega-deals.

EDIF 1 reached its cap early last year after a fifth round of fundraising attracted €721 million in commitments.

The portfolio now includes eight infrastructure companies across five sectors (water, gas, electricity, broadcasting towers and transport) and six countries (Britain, Finland, Germany, ­Sweden, Denmark and Spain).

The investor base of 49 institutional investors has been lured by a stable, 5-7 per cent cash yield, and a 10-15 per cent gross internal rate of return over the long term.

“Our sweet spot is definitely core infrastructure, being transport and utility investments,” Mr Clausen said. “Since we entered the infrastructure investment space in 1994, our core infrastructure has returned 13.2 per cent compared to 12 per cent for our ­infrastructure returns.” The success of the fund was also attributed to a commitment to “responsible” investing, with environmental, social and governance (ESG) policies and practices integrated with each business.

CFSGAM targets lead or co-lead roles to ensure board representation and voting rights on all decisions, including implementation of ESG principles.

Preparation for EDIF 2 comes as the US Federal Reserve has ­lifted interest rates for the first time since the financial crisis.

Mr Clausen said the general rule was that a rising interest rate environment, in excess of ­inflation and growth, led to lower returns from infrastructure ­assets, at least for a period.

The reverse was true where ­inflation and growth outstripped rate rises. “But movements in ­interest rates and other macro variables can affect value in different ways, and sometimes movements in one space offset movements in another,” he said.

“Moreover, any windfalls or shortfalls in asset value tend to be recovered by the regulator over the course of the regulatory cycle.”

Rate increases would be ­expected to act as a welcome curb on the competition for assets.

CFSGAM said in a recent ­report that the overwhelming concern of infrastructure investors was “too much money eroding returns”.

“We believe this has led to some investors mispricing risk, ­either by overpaying for assets or engaging in ‘style drift’ into ­peripheral infrastructure assets,” the report said.

“To the extent that higher rates alleviate this behaviour, we see this as a positive development as far as asset acquisitions are concerned.”