Fund managers in Australia are likely to fold or consolidate as their superannuation clients merge, according to IFM Investors Chief Executive Brett Himbury.
Any consolidation of super funds – IFM is owned by 27 of them – would lead to similar moves among GPs, Himbury said at his company's annual results briefing today (29 July). This will also give IFM an opportunity to hire, he added.
“As the Australian super industry consolidates, what that is going to mean is there is going to be a smaller number of larger super funds," Himbury told reporters. "What that means is there will be less money going to less managers at lower margins,” he added.
His comments come amid a climate of change, with super fund mergers on the rise as pressure mounts on regulator Australian Prudential Regulation Authority (APRA) to penalise underperforming funds. The biggest deal announced this year was a merger of NSW’s First State Super with VicSuper to form an AUD 120bn (USD 83bn) LP, which would rival the biggest - AustralianSuper.
Smaller funds Tasplan and MTAA Super are also considering a merger to create an AUD 22bn fund after the recent collapse of plans for a tie-up between three funds – Tasplan, Statewide Super and WA Super.
IFM reported a 31%, AUD 22bn, net rise in funds under management to AUD 140bn for the year through 30 June.
The vast majority of the money came from Australia, and a large part is cash, Himbury said. “When you take out cash, the support is around a third from the Asia Pacific, a third from the Americas and a third from Europe,” he said.
Pre-tax "normalised" profit - which removes one-off large gains and losses - was AUD 114m for IFM’s 2018-19 financial year, compared to AUD 83.2m for 2017-18. The profit margin was 21% compared to 25% the previous year.
Like other large Australian fund managers, IFM has been focusing on offshore investments as Australian opportunities dry up.
However, Himbury said he would prefer to be spending LP's money in IFM's home market as well.
“Our clients are making the asset allocation decision, but we’d like to invest more in Australia both in listed and unlisted, debt and equity. We like the higher degree of political stability that seems to exist now and we like the economic and investment outlook,” he said.
In a veiled call for more government privatisations, he said super and pension funds should be allowed to invest further in Australia’s “above ground” asset base to drive greater productivity.
“Australia has enjoyed a world record run of economic growth and a big part of it has been population growth. [But] we need to be more focused on productivity growth,” he said.
As well as brownfield infrastructure, he said IFM would look at expanding its investments in debt, private equity, and greenfield projects.
“In unlisted markets, we continue to grow our footprint in private market debt,” Himbury said. “In private equity, we will look to increase our team and investments in Australia – there is a significant opportunity to transform the private equity model as well as the time horizon [for PE investments].”
IFM has been looking to lend more to greenfield infrastructure projects, including PPPs and energy projects, but it also wants to lead more equity investments in new infrastructure.
Most recently that has included an AUD 5bn market-led proposal (MLP) in Victoria for the AUD 13bn Melbourne Airport Link.
“Increasingly we will seek to focus on some of the transformational opportunities and for us to lead the consortium and pull together the financiers. We will be more active in MLPs where [we will be] the long term provider of market capital,” he added.
Low interest rates
Himbury said the change in central bank sentiment on interest rates in the past 12 months from plans to raise rates to now cutting them was "remarkable" and would increase pressure to avoid competitive auctions as more investors pile into infrastructure as a result.
"It has been quite remarkable the extraordinary change in the interest rate environment," he said. "Our base case is that interest rates will remain low. It will be very difficult to extract returns if you’re base rates are low and getting lower."
"[We will try to focus on] bilateral negotiations rather than public auctions. It is going to be a difficult environment going ahead, but we still think that there are opportunities out there, particularly if you have got scale."
He pointed to IFM's recent acquisition of listed midstream US gas company, Buckeye, for an enterprise value of AUD 10.3bn as an example of a bilateral deal where IFM approached the company.