IFM boss David Neal asks if long-term, multi-generational investors like pension funds can't get together to deal with systemic risks, then who can.
Will IFM's business model change as big funds like Australian Super build up offshore offices with the express purpose of doing private deals? What is IFM's competitive edge? Are you competing with the funds? Do you get into bidding wars?
IFM was set up as a collective vehicle to generate scale benefits by aggregating workers' savings to make major investments in infrastructure and private equity and build the necessary expertise.
Our competitive advantage? We were created by the not-for-profit super funds and share their values and objectives.
That kind of intrinsic alignment is rare. The combination of our distinctly aligned ownership model, our like-minded long-term institutional investor clients, and our dedicated global team has delivered risk-adjusted returns to our investors and strong growth across the board.
As the super funds grow, it is natural that they will build out their own investment teams and expertise, as they have across other parts of their operations, and we welcome this.
It means IFM's operating model will continue to evolve. As we have done with Sydney Airport, for example, we will work more closely on transactions and more broadly engage with our key shareholders on how their portfolios will develop and how we can add value to them and their members. From an IFM perspective, we see the upside in the greater scale and expertise that our major shareholders now have.
Are you working more for overseas pension funds than local ones? Is that partly why big Australian super funds are setting up offices?
Australian industry superannuation funds are some of the fastest-growing funds in the world, so, understandably, they are expanding their global footprint on behalf of their members.
For IFM, from deal origination and asset management perspective, you can't beat feet on the ground, and the businesses we hold in our portfolios span more than 20 countries. It also makes sense from a business development perspective and growing our offshore investor base. For these reasons, we have ten offices across Australia, Europe, North America and Asia. Over the last five years, we have almost tripled the number of offshore clients we serve to more than 540 and doubled the size of our global team. We expect this global growth to continue and are positioning ourselves to achieve that.
I think it would be fair to say we work hard for our pension-fund investors regardless of their location. This year, for example, our infrastructure team closed several large transactions, including Sydney Airport and a partnership with ERG (one of Europe's largest renewable energy producers). These transactions benefit the pension funds invested in our infrastructure strategies and the 120 million working people they represent.
Preqin's latest report shows that investors are moving away from private equity towards other alternatives, yet even then the pace of growth has slowed. With the pullback in equities, allocations to alternatives are high. Where do you see private markets going?
It's an uncertain and difficult time for investors with different pressures on them, which is affecting investor preferences. It's also a time when taking a long-term view, arguably, has never been more vital.
As we have come through the pandemic and in the first half of this year, we saw institutional investors allocating more funds to private markets. This makes sense, given the market environment of inflation spikes and rising interest rates. At this point in the cycle, debt investors are seeing portfolio yields rising, and infrastructure investors are gaining defensive benefits from non-correlation to public markets.
Generally, in times like these, asset owners can finally see the benefits of well-diversified portfolios with meaningful allocations to more resilient, less cyclical, cash flow generative, inflation-linked assets. For these reasons and others, private markets will remain paramount to long-term investors. There may also be opportunities on the horizon if asset prices drop.
What are the challenges facing IFM? What is the nature of the big private investment deals ahead and how can you access them? How will the global investment opportunity set evolve?
Governments globally are examining options to enhance energy security, which is even more important now.
In the EU and UK, especially, the geopolitical imperatives for developing renewable energy have become clearer and industry commentators have flagged the potential for these events to provide a catalyst in accelerating investment in the net zero transition.
But the scale and complexity of this task cannot be understated. One stat that I keep close to hand is the International Energy Agency statement that by 2030 close to US$1 trillion ($1.37 trillion) will be needed annually for clean energy infrastructure. That's annually.
This is likely to spur the creation and adoption of new technologies, products and modes of transport, which in turn create new business and investment opportunities. In addition to increasing renewable energy capacity, we also need to encourage the take-up of low-carbon fuels, increase investment in infrastructure that supports electrification, and develop carbon capture and storage facilities.
At IFM, we are certainly active across these areas, building our skills, resources and networks to keep pace with developments and deploying substantial capital into these new energy opportunities. One of our funds has recently invested in ERG - one of Europe's largest independent green power producers and developers.
However, investment in new infrastructure is only part of the solution. Some estimates show that half of the global infrastructure of 2050 is already built, under construction or being planned, implying that active transition strategies will be necessary to meet carbon reduction targets. The role of existing infrastructure in a net zero world is significantly understated. There are, and will continue to be, attractive investment opportunities in transitioning infrastructure assets to generate long-term investment returns.
Investing in behind-the-meter clean energy is one example - it can reduce costs and almost certainly improves the resilience of the asset in the long term. Our airport assets now have substantial clean energy behind the meter. Vienna Airport has Austria's biggest solar plant, and Melbourne Airport has just completed building a solar farm with 30,000 solar panels that deliver 15 per cent of the airport's electricity needs.
We are also able to benefit from the scale of our portfolio. In Australia, we have set up a renewable energy Power Purchasing Agreement program across our Australian assets. We worked on the PPA in collaboration with another asset owner, QIC, to facilitate the supply of more than 400Gwh of renewable energy each year by 2025. It will help many of these assets achieve net zero earlier than planned.
And critically, all of these initiatives are accretive to the financial performance of these assets while the lack of strategic consideration for transitioning to a low-carbon economy could undermine the long-term financial sustainability of any business.
Although a necessary task, transitioning infrastructure assets to a net zero economy is complex and challenging and must be done with the recognition that infrastructure assets, by definition, are essential services. We must recognise the urgency of the transition task, but equally, we must plan and be organised about how we achieve it.
In a recent speech, you stressed the need for greater collaboration between pension funds and fund managers. Will we see this?
As we continue to understand more about the environmental and social system around us, and how it is changing, and as it becomes clearer that as a global community we are not making the progress we need to at the pace we need to, it is also becoming clear that to deliver strong long-term returns for our beneficiaries, and the generations of beneficiaries after them to whom we also owe a fiduciary responsibility, investors like ourselves need to be working to strengthen the system itself, not just individual assets within it.
This means extending our analysis beyond the footprint of the specific investments we make and understanding how our investment activity and the activity of our assets might influence the health of the economic, environmental and social system around us.
Healthy long-term investment returns are dependent on healthy environmental and social systems, now and in the future. The quality of investment returns in 30 years depends on the quality of the system in 30 years.
The Future Fund has noted that insured losses from natural disasters have increased from circa US$10 billion per annum in the 1980s to US$45 billion in the last decade (inflation-adjusted) and that direct overall losses have been four times the size of insured losses and have increased approximately threefold in the last 30 years.
Beyond 2035, the physical impacts are expected to exceed the transition impacts, meaning that losses would be even higher if there is a failure to transition to net zero.
We need to orient our activity to strive for a positive impact on this system. We have to do this mindful of our ability and opportunity to produce positive financial outcomes that our scale and scope can deliver, and again, critically, this is entirely consistent with fiduciary duty, and I'd even argue is required by fiduciary duty. However, almost by definition, the impact of a single investor or investment manager on these systemic risks is tiny. So, we must organise ourselves to collaborate much more strongly to influence systemic risks.
I think we will start hearing a lot more about pension capital as a class because it is ideally suited to dealing with systemic risks for a range of reasons. If long-term, multi-generational investors like pension funds can't collaborate to deal with systemic risks, then who can? Who else in finance has that kind of time horizon? Of course, it's much harder to mobilise independent groups to collaborate on long-term systemic issues like climate risk than it is for urgent and immediately impactful events like a pandemic especially working through agents like fund managers who are naturally incentivised by shorter-term metrics.
This time-horizon challenge is something the climate change agenda has been struggling with for decades. However, I think that the rising sophistication of the pension fund industry, with stronger internal teams and more professional management, means that these funds are increasingly well-equipped to address this critical fiduciary risk issue through collaboration.
As an asset manager wholly owned by superannuation funds, we share the perspective of the long-term asset owner and are keen to play a role in this collaboration imperative.
IFM seems to be mostly allocated to infrastructure and private debt. Are those allocations likely to alter?
Private markets remain central to our global growth strategy. We currently have around $200 billion in funds under management across four asset classes - Infrastructure, Debt, Private Equity and Listed Equities - and continue to develop our capabilities across each of these functions. Infrastructure and debt investment are our largest functions. The size of our asset classes largely reflects our investors' allocations and focus. We also have around $40 billion invested in listed equity strategies including indexed, active and small caps products. There is also a growing interest in sustainability strategies within this asset class and we have been working on new products and solutions in this area.
In June, for example, we launched a Climate Transition Fund for Australian-listed equities, becoming one of the first Australian fund managers to create a climate-enhanced index solution. This product seeks to help investors reduce their carbon emissions exposure without taking on significant tracking error and fees. This is one of a number of new investment strategies we have taken to market over the last year or so. Our infrastructure, debt and private equity teams have also been actively marketing new strategies.