1 00:00:00,000 --> 00:00:06,680 Hi, I'm Murdoch Gaddy and thanks for listening to the Rate of Change with York Wealth Management. 2 00:00:06,680 --> 00:00:11,040 The Rate of Change is a podcast which explores the ever-shifting momentum of financial markets 3 00:00:11,040 --> 00:00:16,800 through the eyes of the leading managers in wealth management. 4 00:00:16,800 --> 00:00:21,660 In today's broadcast, I'm joined by Andrew Killesteyn, the portfolio manager at Palisade 5 00:00:21,660 --> 00:00:26,940 Investment Partners to discuss the Palisade Infrastructure Fund and their infrastructure 6 00:00:26,940 --> 00:00:29,320 trust plus the other funds. 7 00:00:29,320 --> 00:00:34,320 Andrew defines the infrastructure universe, discusses why they look only at particular 8 00:00:34,320 --> 00:00:38,480 Australian mid-tier infrastructure assets to invest in and highlights the importance 9 00:00:38,480 --> 00:00:40,760 of these assets in the community. 10 00:00:40,760 --> 00:00:46,840 According to the January 2023 Fund Fact Sheet, the trust targets income and growth whilst 11 00:00:46,840 --> 00:00:54,080 their average return was 9.8% for the past 12 months, 8.5% for the past three years, 12 00:00:54,080 --> 00:00:59,840 and 5.1% for five years, and they've averaged 9% since inception. 13 00:00:59,840 --> 00:01:06,640 We dive into most of the assets such as airports, wind farms, gas pipelines, ports, plus others, 14 00:01:06,640 --> 00:01:12,560 and I found the conversation on the Sunshine Airport quite interesting. 15 00:01:12,560 --> 00:01:18,640 He discusses everything from why they look for these assets to how the tender process 16 00:01:18,640 --> 00:01:20,800 works to acquire these assets. 17 00:01:20,800 --> 00:01:26,280 I really enjoyed his insights into the Australian infrastructure universe, so please remember 18 00:01:26,280 --> 00:01:32,960 to listen to the disclaimer at the end of the broadcast and keep your feedback coming. 19 00:01:32,960 --> 00:01:38,400 You can reach me at mgatty at ywm.com.au. 20 00:01:38,400 --> 00:01:43,080 And with that being said, I hope you enjoyed this conversation as much as I did, so sit 21 00:01:43,080 --> 00:01:48,320 back, relax, and enjoy it. 22 00:01:48,320 --> 00:01:51,840 Andrew Killestone, welcome to the Rate of Change with your cloth management. 23 00:01:51,840 --> 00:01:52,840 Thank you, Murdoch. 24 00:01:52,840 --> 00:01:53,840 Great to be here. 25 00:01:53,840 --> 00:01:54,840 Absolutely. 26 00:01:54,840 --> 00:01:59,280 Why don't we kick things off, and can you give everyone a bit of an idea of how you 27 00:01:59,280 --> 00:02:04,160 got into financial markets, a bit of your background, and a bit about yourself? 28 00:02:04,160 --> 00:02:05,240 Yeah, sure. 29 00:02:05,240 --> 00:02:13,400 So I'm a Canberra boy originally, and at university I did economics and commerce, and so when 30 00:02:13,400 --> 00:02:20,240 I finished uni I had the choice of either being an accountant, an investment banker, 31 00:02:20,240 --> 00:02:21,760 or an economist. 32 00:02:21,760 --> 00:02:27,480 And so I got a job offer from Deloitte in Canberra at the time and sort of went down 33 00:02:27,480 --> 00:02:32,880 the accountancy path and I think pretty quickly worked out that my heart lied in finance. 34 00:02:32,880 --> 00:02:37,440 And so I had a couple of friends actually that were at Macquarie and applied for the 35 00:02:37,440 --> 00:02:43,240 Macquarie graduate program in Sydney, and fortunately I was lucky enough to be offered 36 00:02:43,240 --> 00:02:49,000 a role there and went into their infrastructure funds business back in 2005. 37 00:02:49,000 --> 00:02:55,320 And if you recall back then, that was around the time that real private investment in infrastructure 38 00:02:55,320 --> 00:02:56,800 was taking off in Australia. 39 00:02:56,800 --> 00:03:03,200 And if you can recall those three massive listed satellite funds, Macquarie Airports, 40 00:03:03,200 --> 00:03:06,760 Macquarie Infrastructure Group, which was the Rhodes Fund, and Macquarie Communications 41 00:03:06,760 --> 00:03:09,840 Group, they were the big three funds at the time. 42 00:03:09,840 --> 00:03:17,000 And it was great to get exposure to sort of what was undoubtedly the leader in infrastructure 43 00:03:17,000 --> 00:03:19,960 investment at the time in Macquarie. 44 00:03:19,960 --> 00:03:24,960 So how did Macquarie lead to Palisade? 45 00:03:24,960 --> 00:03:31,520 So I left Macquarie in 2012 and really that was around sort of trying something new. 46 00:03:31,520 --> 00:03:37,240 So I then went to JAR, which is one of the asset consultants, one of the leading institutional 47 00:03:37,240 --> 00:03:41,120 asset consultants in Australia, and headed up their direct investments business, which 48 00:03:41,120 --> 00:03:48,160 was advising a lot of superannuation clients on direct investments into infrastructure 49 00:03:48,160 --> 00:03:49,160 projects. 50 00:03:49,160 --> 00:03:54,080 I was there for about three years and then was lucky enough to move over to Palisade 51 00:03:54,080 --> 00:03:57,800 to sort of head up their portfolio function as to function. 52 00:03:57,800 --> 00:04:01,480 So I've been there for the last six years and loving it. 53 00:04:01,480 --> 00:04:07,520 So before we get into the details of Palisade, which everyone's interested in, the infrastructure 54 00:04:07,520 --> 00:04:11,560 space is quite an interesting one, especially what's happened in the past couple of decades. 55 00:04:11,560 --> 00:04:15,960 Can you give everyone a bit of an idea of what exactly is the infrastructure universe 56 00:04:15,960 --> 00:04:17,520 in your opinion? 57 00:04:17,520 --> 00:04:27,840 Yeah, so infrastructure is a set of assets that fundamentally these assets are essential 58 00:04:27,840 --> 00:04:31,680 for the efficient functioning of an economy, right? 59 00:04:31,680 --> 00:04:39,680 So we're talking about airports, ports, electricity generation, energy transmission distribution. 60 00:04:39,680 --> 00:04:45,900 Digital infrastructure is somewhat of a merging asset class. 61 00:04:45,900 --> 00:04:49,840 It was emerging pre-COVID, but certainly the onset of COVID and the working from home and 62 00:04:49,840 --> 00:04:55,160 remote working sort of accelerated obviously data usage in the world. 63 00:04:55,160 --> 00:05:00,360 And so digital infrastructure is certainly one of those asset classes which is emerging 64 00:05:00,360 --> 00:05:02,360 more quickly than others. 65 00:05:02,360 --> 00:05:10,240 But ultimately, from a business sense and a business characteristic sense, infrastructure 66 00:05:10,240 --> 00:05:15,160 is very much monopolistic in nature, high barriers to entry. 67 00:05:15,160 --> 00:05:21,520 And so what that means from a investment fundamentals point is that it is often seen as a defensive 68 00:05:21,520 --> 00:05:25,040 asset class within a broader portfolio. 69 00:05:25,040 --> 00:05:28,720 And coupled with that, you do get strong and stable income yields. 70 00:05:28,720 --> 00:05:35,280 And so, you know, what role does unlisted infrastructure play in a broader portfolio? 71 00:05:35,280 --> 00:05:43,000 You know, I think the key really is that it's a non-correlated strategy to more traditional 72 00:05:43,000 --> 00:05:47,280 asset classes and provides that sort of balancing effect for the portfolio. 73 00:05:47,280 --> 00:05:50,480 Okay, so that's essentially the universe. 74 00:05:50,480 --> 00:05:56,640 So what's Palisades' approach and their investment philosophy? 75 00:05:56,640 --> 00:06:01,920 And I suppose, as you said, you've been, Macquarie, you've seen how they kick this all off. 76 00:06:01,920 --> 00:06:08,760 So I'm actually really interested into why is what Palisades doing different? 77 00:06:08,760 --> 00:06:11,920 You know, what's their niche? 78 00:06:11,920 --> 00:06:17,440 So we are very much about mid-market infrastructure. 79 00:06:17,440 --> 00:06:25,040 And that's been a very deliberate focus of ours since we started back in 2008. 80 00:06:25,040 --> 00:06:28,760 And really at the time there, we saw a gap in the market. 81 00:06:28,760 --> 00:06:34,280 Obviously, large cap infrastructure at the time was very well banked, right? 82 00:06:34,280 --> 00:06:38,840 So you think about your large capital city airports and ports, there was significant 83 00:06:38,840 --> 00:06:43,800 amount of capital investing in those projects and a significant amount of interest. 84 00:06:43,800 --> 00:06:47,480 Mid-infrastructure, on the other hand, was relatively untouched at that point in time. 85 00:06:47,480 --> 00:06:52,000 And when we talk about mid-market, we're talking about assets that are lower down on the size 86 00:06:52,000 --> 00:06:56,200 spectrum and people often ask me, what size investments are you targeting? 87 00:06:56,200 --> 00:06:59,720 It can be quite hard to answer that because each sector is slightly different. 88 00:06:59,720 --> 00:07:04,040 But if we were to put a number on it, you know, we're generally looking at assets of 89 00:07:04,040 --> 00:07:08,220 $500 million enterprise value, you know, up to a billion dollars, a billion dollars would 90 00:07:08,220 --> 00:07:12,000 be a big transaction for us. 91 00:07:12,000 --> 00:07:15,880 And so our approach is very much targeting that mid-market space. 92 00:07:15,880 --> 00:07:18,400 Now, why do we like that space? 93 00:07:18,400 --> 00:07:20,960 It's really two reasons. 94 00:07:20,960 --> 00:07:29,040 The first is simply down to demand and supply in that we believe and I think our portfolio 95 00:07:29,040 --> 00:07:38,880 is evidence of this that there is an abundance of mid-market assets for investment in the 96 00:07:38,880 --> 00:07:40,660 Australian market. 97 00:07:40,660 --> 00:07:46,120 When you compare that to the large cap space, you know, can be, the pipeline can be more 98 00:07:46,120 --> 00:07:50,600 driven by whatever the privatised notion of genders of the state governments may be at 99 00:07:50,600 --> 00:07:51,840 a particular point in time. 100 00:07:51,840 --> 00:07:57,400 So we very much believe there is a greater supply of assets in the mid-market. 101 00:07:57,400 --> 00:08:03,800 And then on the demand side, if you think about the traditional investors into infrastructure, 102 00:08:03,800 --> 00:08:11,200 that's been your Australian superannuation funds, your offshore pension funds, your offshore 103 00:08:11,200 --> 00:08:16,960 sovereign wealth funds, who have significant amounts of capital to invest and they're generally 104 00:08:16,960 --> 00:08:22,080 the ones that have been pushed up prices, particularly in that large cap space, right? 105 00:08:22,080 --> 00:08:28,280 We don't tend to see those larger investors in the mid-cap space just because of the scalability 106 00:08:28,280 --> 00:08:30,680 of mid-market compared to large cap. 107 00:08:30,680 --> 00:08:36,120 And so simply from a demand-supply dynamic, we believe there's better pricing available 108 00:08:36,120 --> 00:08:41,880 in the mid-market and that results in better risk-adjusted returns for investors. 109 00:08:41,880 --> 00:08:45,200 The other reason why we like the mid-market is around control, right? 110 00:08:45,200 --> 00:08:51,160 So any infrastructure manager will tell you that they have an active approach to asset 111 00:08:51,160 --> 00:08:53,360 management and we do as well. 112 00:08:53,360 --> 00:08:54,360 We will tell you that. 113 00:08:54,360 --> 00:08:57,280 Now, what does that practically mean for us? 114 00:08:57,280 --> 00:09:03,000 That means that given the size of the assets that we're acquiring, we are generally able 115 00:09:03,000 --> 00:09:09,320 to, between our fund and our co-investment partners, able to acquire majority stakes 116 00:09:09,320 --> 00:09:11,760 in assets, if not 100% of assets. 117 00:09:11,760 --> 00:09:16,400 And what that means is that we're able to work very closely with the management teams 118 00:09:16,400 --> 00:09:20,800 of those underlying assets to drive value for investors. 119 00:09:20,800 --> 00:09:29,960 How does the unlisted work differently to the listed infrastructure funds in the market? 120 00:09:29,960 --> 00:09:31,200 What's the pros and cons? 121 00:09:31,200 --> 00:09:38,880 Yeah, I mean, with listed, you're ultimately buying a small stake in a company, right? 122 00:09:38,880 --> 00:09:47,680 And so you're very much, with listed infrastructure, is very much about the analysis of the stock 123 00:09:47,680 --> 00:09:53,400 itself and whether it's underpriced or overpriced and what that means for your portfolio. 124 00:09:53,400 --> 00:10:02,400 Obviously, with listed infrastructure, you are subject to market noise. 125 00:10:02,400 --> 00:10:10,000 And I think a lot of people probably won't realise, or maybe they do realise, that they 126 00:10:10,000 --> 00:10:15,800 would already have exposure to listed infrastructure, probably through their equities portfolios. 127 00:10:15,800 --> 00:10:19,960 In Australia, the listed infrastructure universe isn't big, right? 128 00:10:19,960 --> 00:10:24,040 So I think people have already got exposure to listed infrastructure in their portfolios 129 00:10:24,040 --> 00:10:25,480 already. 130 00:10:25,480 --> 00:10:29,320 When you look at unlisted infrastructure, it's very much a different mindset. 131 00:10:29,320 --> 00:10:32,280 It's an active approach to asset management. 132 00:10:32,280 --> 00:10:34,440 You don't get that volatility, right? 133 00:10:34,440 --> 00:10:38,100 So all of our assets are independently valued. 134 00:10:38,100 --> 00:10:42,280 And we can see, and we've got some charts that we can show investors that you can see 135 00:10:42,280 --> 00:10:50,520 that the drawdown or the negative return in any period for our strategy versus listed 136 00:10:50,520 --> 00:10:52,680 strategies is markedly different, right? 137 00:10:52,680 --> 00:10:59,280 So I think the key difference between unlisted and unlisted is around that stability point 138 00:10:59,280 --> 00:11:02,960 of returns and not necessarily subject to market cycles. 139 00:11:02,960 --> 00:11:06,680 I won't go into an argument of whether listed or unlisted is better. 140 00:11:06,680 --> 00:11:11,320 There have been numerous papers put out by managers on both sides and they're very self-serving, 141 00:11:11,320 --> 00:11:14,000 let's say, on sort of which is the better strategy. 142 00:11:14,000 --> 00:11:15,480 So we'll leave that argument for another time. 143 00:11:15,480 --> 00:11:21,880 Well, I can just say from my perspective that they're tools in order to get a job done. 144 00:11:21,880 --> 00:11:27,240 Some work better in some macro environments from a liquidity standpoint, whilst others, 145 00:11:27,240 --> 00:11:33,320 if things turn ugly, you can get hurt quite badly, whilst the other vehicle can weather 146 00:11:33,320 --> 00:11:34,400 the storm quite well. 147 00:11:34,400 --> 00:11:39,760 So you'd probably agree that the different vehicle may be more of a choice based on what's 148 00:11:39,760 --> 00:11:43,760 currently happening on a macro standpoint than on the micro. 149 00:11:43,760 --> 00:11:44,760 That's right. 150 00:11:44,760 --> 00:11:48,600 It comes down to investor objectives and their need for liquidity, their tolerance for volatility 151 00:11:48,600 --> 00:11:49,600 as well. 152 00:11:49,600 --> 00:11:50,600 Yeah, exactly. 153 00:11:50,600 --> 00:11:55,360 Well, look, the reason why we're here today is I really want to get a better understanding 154 00:11:55,360 --> 00:12:00,480 of what investment opportunities Palisades is currently offering. 155 00:12:00,480 --> 00:12:05,640 Our understanding, and what we're going to learn about, is specifically on the infrastructure 156 00:12:05,640 --> 00:12:06,640 of funds. 157 00:12:06,640 --> 00:12:12,440 So what vehicles are currently available, what's their mandates, and why have they been 158 00:12:12,440 --> 00:12:14,440 structured in that way? 159 00:12:14,440 --> 00:12:15,440 Yeah, sure. 160 00:12:15,440 --> 00:12:20,160 So with respect to, so we have three vehicles across the business. 161 00:12:20,160 --> 00:12:24,800 Our diversified fund, which is our flagship open-ended fund. 162 00:12:24,800 --> 00:12:32,320 So it has exposure to 25-odd assets in the portfolio already, and that fund will continue 163 00:12:32,320 --> 00:12:37,440 to grow over time and will continue to invest along the various sector lines within that 164 00:12:37,440 --> 00:12:38,440 fund. 165 00:12:38,440 --> 00:12:42,880 So that's our institutional fund, and that's where the majority of our institutional investors 166 00:12:42,880 --> 00:12:47,040 come through, like our superannuation funds and insurance clients. 167 00:12:47,040 --> 00:12:51,560 We then have a specialised renewable energy fund and social infrastructure fund, social 168 00:12:51,560 --> 00:12:56,880 infrastructure PPP fund, which are a government availability-style cash flows. 169 00:12:56,880 --> 00:13:01,400 Now, those two funds are funds in their own right, and they're more for investors who 170 00:13:01,400 --> 00:13:05,720 want specific exposure to those particular sectors. 171 00:13:05,720 --> 00:13:10,440 But also our diversified fund invests in those funds as well, and that's how the diversified 172 00:13:10,440 --> 00:13:16,920 fund gets its exposure to renewable energy and to social infrastructure PPPs. 173 00:13:16,920 --> 00:13:26,600 So I think when we're offering our strategy to clients, very much the majority goes through 174 00:13:26,600 --> 00:13:33,240 our diversified offering because that provides exposure to ultimately everything that we 175 00:13:33,240 --> 00:13:35,480 do as a business. 176 00:13:35,480 --> 00:13:44,840 And so for the wholesale market, we have set up a specific wholesale feeder fund that invests 177 00:13:44,840 --> 00:13:47,280 into the diversified fund. 178 00:13:47,280 --> 00:13:56,560 So whenever investors invest into that feeder fund, they will not only get access to all 179 00:13:56,560 --> 00:14:02,280 future investments that we make through the fund, they'll also get access to the assets 180 00:14:02,280 --> 00:14:06,240 and the track record that we've built up over the last 15 years and the existing assets 181 00:14:06,240 --> 00:14:08,240 within the fund. 182 00:14:08,240 --> 00:14:09,240 Okay. 183 00:14:09,240 --> 00:14:12,680 So how much money is currently in those structures? 184 00:14:12,680 --> 00:14:17,960 So in the diversified fund, that's currently a $1.6 billion fund. 185 00:14:17,960 --> 00:14:24,800 I think it should reach $2 billion fairly shortly, given the pipeline of opportunities 186 00:14:24,800 --> 00:14:26,760 that we're looking at. 187 00:14:26,760 --> 00:14:29,480 Within the feeder fund itself, we raised around $300 million. 188 00:14:29,480 --> 00:14:36,800 So that feeder fund is a meaningful part of our diversified institutional fund. 189 00:14:36,800 --> 00:14:42,320 And that feeder fund just sits alongside our other institutional investors within that 190 00:14:42,320 --> 00:14:44,240 institutional fund. 191 00:14:44,240 --> 00:14:50,800 So with new capital coming in, do you take capital at any point in time and then let 192 00:14:50,800 --> 00:14:52,640 it sit there and wait for an opportunity? 193 00:14:52,640 --> 00:14:55,360 Or do you try to get the deal first and then fund it? 194 00:14:55,360 --> 00:14:56,760 Can you give a bit of colour around that? 195 00:14:56,760 --> 00:15:00,760 It's a very good question and it is a fine balance. 196 00:15:00,760 --> 00:15:07,160 Obviously unlisted infrastructure is an asset class where it can be quite opportunistic. 197 00:15:07,160 --> 00:15:12,800 So we can sometimes go six months, even 12 months without doing a transaction because 198 00:15:12,800 --> 00:15:19,520 sometimes these transactions have a long gestation period in terms of either working with partners 199 00:15:19,520 --> 00:15:24,200 or developers or whatever it may be to bring a project to fruition. 200 00:15:24,200 --> 00:15:30,400 On the other hand, and this is sort of the experience that we've had of late, we can 201 00:15:30,400 --> 00:15:32,480 do three transactions in three months. 202 00:15:32,480 --> 00:15:34,000 So it just really depends. 203 00:15:34,000 --> 00:15:43,840 So for that reason, we've tried to match as best as possible raising capital in the fund 204 00:15:43,840 --> 00:15:45,160 to meet those transactions. 205 00:15:45,160 --> 00:15:50,960 So in answer to your question, no, the fund isn't open all the time because we don't want 206 00:15:50,960 --> 00:15:58,840 a situation where people invest capital and then that capital fits there without a home. 207 00:15:58,840 --> 00:16:01,840 And before we get into the really interesting part, learning exactly how the mechanics of 208 00:16:01,840 --> 00:16:06,400 that all work, how's the performance been? 209 00:16:06,400 --> 00:16:08,240 What are you targeting? 210 00:16:08,240 --> 00:16:13,040 I believe you have an income target and then the second one, a growth component. 211 00:16:13,040 --> 00:16:14,040 How's that work? 212 00:16:14,040 --> 00:16:17,880 Yeah, I mean, performance has been good. 213 00:16:17,880 --> 00:16:24,160 If we look at the 12-month numbers, generally we're targeting high single digit net total 214 00:16:24,160 --> 00:16:25,960 returns on this strategy. 215 00:16:25,960 --> 00:16:31,000 I think the numbers over the last 12 months were 9.8%. 216 00:16:31,000 --> 00:16:34,600 So we're at the higher end of that return target. 217 00:16:34,600 --> 00:16:40,560 And then from a yield perspective, remembering my comments earlier that this is a, some consider 218 00:16:40,560 --> 00:16:46,400 it an asset class, but sort of without getting into an argument of whether it's defensive 219 00:16:46,400 --> 00:16:51,080 or growth, undoubtedly this is an asset class that produces stable income yields. 220 00:16:51,080 --> 00:16:55,120 Why don't we use the phrase, it's uncorrelated to some market volatility. 221 00:16:55,120 --> 00:16:57,080 That sounds good. 222 00:16:57,080 --> 00:17:01,680 And so generally we're targeting yields of 5 to 6%. 223 00:17:01,680 --> 00:17:06,280 And certainly that's what we've been able to deliver the last 12 months. 224 00:17:06,280 --> 00:17:11,600 I think what's more pleasing though is the returns that we've been able to generate 225 00:17:11,600 --> 00:17:12,600 over the long-term. 226 00:17:12,600 --> 00:17:18,800 And so our 10-month returns are currently sitting at around 11% total return net and 227 00:17:18,800 --> 00:17:20,560 around about 6% yield. 228 00:17:20,560 --> 00:17:26,280 So I think in some ways that is the more pleasing number for us rather than the sort of 12-month 229 00:17:26,280 --> 00:17:28,800 and 6-month returns more recently. 230 00:17:28,800 --> 00:17:34,480 So staying on the returns for a second, how were the returns impacted in a rate environment 231 00:17:34,480 --> 00:17:36,760 that pretty much went nearly to zero? 232 00:17:36,760 --> 00:17:40,720 And we've had probably the most aggressive round of rate we've seen in such a shorter 233 00:17:40,720 --> 00:17:42,120 period. 234 00:17:42,120 --> 00:17:48,560 Does the fund, the investment vehicles benefit from an uplift in the cash rate? 235 00:17:48,560 --> 00:17:56,560 If I had a penny for every time I've been asked, how do you expect infrastructure valuations 236 00:17:56,560 --> 00:17:59,240 to perform in this latest market? 237 00:17:59,240 --> 00:18:06,160 So I think it's important to think about how understated infrastructure is valued. 238 00:18:06,160 --> 00:18:09,440 It's valued typically on a discounted cash flow basis. 239 00:18:09,440 --> 00:18:12,520 These are very stable assets with predictable cash flows. 240 00:18:12,520 --> 00:18:20,960 And so it's not unusual that assets are valued using a 30-, 40-, 50-year cash flow model. 241 00:18:20,960 --> 00:18:24,000 And so one element of evaluation is the forecast cash flows. 242 00:18:24,000 --> 00:18:28,640 And then the other element of evaluation is the discount factor, the discount rate for 243 00:18:28,640 --> 00:18:29,640 those cash flows. 244 00:18:29,640 --> 00:18:33,840 Now all of our assets are independently valued. 245 00:18:33,840 --> 00:18:41,320 And our independent valuers take us through the cycle approach to determining what an 246 00:18:41,320 --> 00:18:42,880 appropriate discount rate is. 247 00:18:42,880 --> 00:18:47,520 So in the last 10 years, we've had a period of significant falling bond yields. 248 00:18:47,520 --> 00:18:52,040 We did not see discount rates fall in lockstep with those bond yields. 249 00:18:52,040 --> 00:18:57,680 And equally, we did not expect and we have not seen discount rates increase in lockstep 250 00:18:57,680 --> 00:18:59,200 with bond yields. 251 00:18:59,200 --> 00:19:05,080 So I'll be sitting here saying that discount rates might go up. 252 00:19:05,080 --> 00:19:08,720 No, I think there's definitely upward pressure to discount rates. 253 00:19:08,720 --> 00:19:09,720 Will they go up materially? 254 00:19:09,720 --> 00:19:12,120 No, I don't think so. 255 00:19:12,120 --> 00:19:19,880 The other side of the coin though is that remembering that this asset class, and in 256 00:19:19,880 --> 00:19:25,400 particular this fund, has strong CPI correlation. 257 00:19:25,400 --> 00:19:31,620 So our CPI correlation across the portfolio is 0.8. 258 00:19:31,620 --> 00:19:38,160 So what that means is that if there's a 1% increase in CPI above our expectations, that 259 00:19:38,160 --> 00:19:42,960 results in a 0.8% increase in the value of the portfolio. 260 00:19:42,960 --> 00:19:46,480 So very strong inflation correlation in the portfolio. 261 00:19:46,480 --> 00:19:52,360 And so the other side of the coin on valuations is that if there's high bond yields that are 262 00:19:52,360 --> 00:19:58,600 being implemented to target high inflation, that's actually a benefit for our portfolio. 263 00:19:58,600 --> 00:20:05,320 And we've seen this play out the last six or 12 months whereby the portfolio has actually 264 00:20:05,320 --> 00:20:11,400 performed really well because it has benefited from high inflation because of the pass through 265 00:20:11,400 --> 00:20:16,160 that because a lot of the underlying assets, they have inflation escalators in the underlying 266 00:20:16,160 --> 00:20:17,160 contracts. 267 00:20:17,160 --> 00:20:18,920 Well, I have to dig into this a bit. 268 00:20:18,920 --> 00:20:23,040 So inflation has been up now, essentially I think the research we're getting from the 269 00:20:23,040 --> 00:20:27,080 states says 80% of all central banks globally are currently in a tightening phase. 270 00:20:27,080 --> 00:20:30,600 Funny enough, China, first one to crash, maybe the first one coming out of this mess and 271 00:20:30,600 --> 00:20:32,740 it's benefiting the high-end law sector. 272 00:20:32,740 --> 00:20:37,920 But if everyone's tightening to essentially put a lid on inflation, and there's an argument 273 00:20:37,920 --> 00:20:42,800 that our good old central banks and governments present to either do a handbrake turn north 274 00:20:42,800 --> 00:20:50,360 or south, or I think the expression running around town is project break everything. 275 00:20:50,360 --> 00:20:54,760 If that's their intention to essentially drive it from a disinflation environment into a 276 00:20:54,760 --> 00:20:59,520 deflation environment, which hasn't been any in like 70 years, how's that going to impact 277 00:20:59,520 --> 00:21:07,720 an investment vehicle, which as you said, benefits on a 0.8% correlation to the movement 278 00:21:07,720 --> 00:21:10,720 in inflation? 279 00:21:10,720 --> 00:21:16,560 To be fair, we're fairly agnostic to what happens with inflation. 280 00:21:16,560 --> 00:21:23,360 The key for us is ensuring that we have inflation protection in the portfolio to ensure that 281 00:21:23,360 --> 00:21:26,480 real returns of investors are preserved. 282 00:21:26,480 --> 00:21:33,080 So if inflation goes down and there's a big tightening cycle, then the reverse happens 283 00:21:33,080 --> 00:21:37,440 and we expect to see benefits in other parts of the portfolio. 284 00:21:37,440 --> 00:21:40,640 Discount rates will likely come down a little bit. 285 00:21:40,640 --> 00:21:44,760 Again, they won't go down in lockstep because of the through the cycle approach that the 286 00:21:44,760 --> 00:21:48,920 valuers look at, but there'll be less upward pressure on discount rates and lower discount 287 00:21:48,920 --> 00:21:51,360 rates pushes values up. 288 00:21:51,360 --> 00:21:58,440 So I think it's very important to consider both sides of the coin with respect to the 289 00:21:58,440 --> 00:22:02,280 discount factor that's applied to valuations and the CPI linkage. 290 00:22:02,280 --> 00:22:08,160 As I said, we're not necessarily investing for a high inflationary environment. 291 00:22:08,160 --> 00:22:12,440 We just want to ensure that real returns are protected within the portfolio. 292 00:22:12,440 --> 00:22:14,720 That makes a lot of sense. 293 00:22:14,720 --> 00:22:19,280 Well, let's talk about these specific assets in the portfolio. 294 00:22:19,280 --> 00:22:23,360 Maybe to give everyone a bit of color, let's talk about the Sunshine Airport. 295 00:22:23,360 --> 00:22:27,040 The reason I want to talk about this is both personal and I find it very interesting. 296 00:22:27,040 --> 00:22:28,920 I heard you just got back from the USRA as well. 297 00:22:28,920 --> 00:22:29,920 I did, yes. 298 00:22:29,920 --> 00:22:30,920 How good is it in the USRA? 299 00:22:30,920 --> 00:22:31,920 Very good, very good. 300 00:22:31,920 --> 00:22:32,920 Particularly when you don't have kids. 301 00:22:32,920 --> 00:22:35,920 Sorry, I do have kids, but I left them at home. 302 00:22:35,920 --> 00:22:40,440 Yeah, look, my grandparents retired there about 30 years ago. 303 00:22:40,440 --> 00:22:45,480 So I think I was very, very lucky to be introduced to a beautiful wilderness caravan park before 304 00:22:45,480 --> 00:22:47,480 turning the mecca that it is today. 305 00:22:47,480 --> 00:22:53,080 I heard you guys were discussing that Sydney Airport is now the fastest growing airport 306 00:22:53,080 --> 00:22:54,080 in Australia. 307 00:22:54,080 --> 00:22:55,080 Sunshine Coast Airport. 308 00:22:55,080 --> 00:22:57,120 Sorry, yeah, the Sunshine Coast Airport. 309 00:22:57,120 --> 00:22:59,120 Is that still the case? 310 00:22:59,120 --> 00:23:02,400 Yeah, it's one of, I won't say it's the fastest because I haven't seen the latest numbers, 311 00:23:02,400 --> 00:23:05,680 but certainly it is one of the fastest growing airports. 312 00:23:05,680 --> 00:23:09,360 And I mean, Sunshine Coast is one of the fastest growing regions in Australia as well, which 313 00:23:09,360 --> 00:23:12,760 obviously then translates into traffic that goes through that airport. 314 00:23:12,760 --> 00:23:16,600 So it's not just airports in the portfolio, but let's just look at that. 315 00:23:16,600 --> 00:23:21,000 Because what I want to understand is the start to finish of how's the tender process works, 316 00:23:21,000 --> 00:23:24,160 how do you identify this as you hit mid-market? 317 00:23:24,160 --> 00:23:28,640 Once you have the asset, how do you ascertain what needs to be improved? 318 00:23:28,640 --> 00:23:34,240 We're talking about a new runway, is it going to turn the airport businesses itself, you 319 00:23:34,240 --> 00:23:38,640 know, you went from just having a couple of dodgy cafes, which we love, to essentially 320 00:23:38,640 --> 00:23:43,960 being like a stockland or a mini Westfield internally with all these fantastic stores. 321 00:23:43,960 --> 00:23:49,960 What's the, so to repeat myself, the tender process, how do you identify fixing things, 322 00:23:49,960 --> 00:23:53,640 how do you manage the business and what's the looking forward? 323 00:23:53,640 --> 00:24:02,320 Yeah, so this transaction started with a tender process that the Sunshine Coast Council put 324 00:24:02,320 --> 00:24:10,240 out at the time and, you know, at the time we had good experience in airports, so we 325 00:24:10,240 --> 00:24:16,240 already had Darwin and Alice Springs airports in our portfolio. 326 00:24:16,240 --> 00:24:21,360 And if you think about Darwin, you know, it is a little bit of a similar story in that 327 00:24:21,360 --> 00:24:26,880 we've just taken that airport through a redevelopment, a terminal redevelopment, and so there are 328 00:24:26,880 --> 00:24:33,440 a lot of credentials that we could put on the table to the Sunshine Coast Council to 329 00:24:33,440 --> 00:24:39,320 show them that we would be an appropriate partner to drive this airport going forward. 330 00:24:39,320 --> 00:24:43,840 And it is very much a partnership with the Council, it's not as though they sell the 331 00:24:43,840 --> 00:24:45,640 asset and then walk away. 332 00:24:45,640 --> 00:24:53,000 Obviously they are heavily invested in ensuring that the service that is being provided at 333 00:24:53,000 --> 00:25:00,040 the airport continues to be top class so they can attract visitors to their region. 334 00:25:00,040 --> 00:25:06,320 So it is very much a partnership that we have with Council there, but during the process, 335 00:25:06,320 --> 00:25:10,400 you know, we obviously did our due diligence, doing due diligence on an airport takes a 336 00:25:10,400 --> 00:25:15,960 long time and we went through that process in terms of looking at traffic forecasts and 337 00:25:15,960 --> 00:25:24,480 ultimately we were selected as the preferred partner for the Council to then sort of own 338 00:25:24,480 --> 00:25:26,440 the airport and manage the airport. 339 00:25:26,440 --> 00:25:33,200 Now a really key part of this transaction was the new runway, right, so the existing 340 00:25:33,200 --> 00:25:38,960 runway that was at Sunshine Coast Airport was a north-south runway along the beach. 341 00:25:38,960 --> 00:25:43,920 I don't know the exact stat but there are a lot of aborted landings because of the crosswinds, 342 00:25:43,920 --> 00:25:53,000 right, and so the Sunshine Coast Council always had this project plan of building a new two 343 00:25:53,000 --> 00:26:00,520 and a half kilometre runway out to the north-west and that does two things, it means that the 344 00:26:00,520 --> 00:26:05,160 crosswinds are not an issue anymore but it means that it is able to attract larger aircraft 345 00:26:05,160 --> 00:26:11,640 as well and that was really the key with Sunshine Coast Airport is it is a huge catchment area, 346 00:26:11,640 --> 00:26:15,240 Sunshine Coast, 500,000 people catchment area, right. 347 00:26:15,240 --> 00:26:20,440 Now a lot of that catchment was being lost to Brisbane Airport because of the availability 348 00:26:20,440 --> 00:26:24,400 of flight, there was not a huge amount of flights available at Sunshine Coast Airport. 349 00:26:24,400 --> 00:26:30,200 So one of the first things that we did when we got in there and with the new owners is 350 00:26:30,200 --> 00:26:39,080 spend a lot of time working with the airlines and showing the benefits of the region, communicating 351 00:26:39,080 --> 00:26:47,160 with them about the new runway and ultimately with a view to attract the airlines and further 352 00:26:47,160 --> 00:26:49,240 routes to the airport, right. 353 00:26:49,240 --> 00:27:00,240 So the new runway was completed 2020 I believe and since we have acquired the airport there 354 00:27:00,240 --> 00:27:04,600 was a Sydney and a Melbourne service, I think there was one Adelaide service and a seasonal 355 00:27:04,600 --> 00:27:10,240 New Zealand service, since that time we have added a Cairns service, a new Carson service, 356 00:27:10,240 --> 00:27:12,520 a Canberra service and additional Melbourne service. 357 00:27:12,520 --> 00:27:21,720 We have now got Bonza, the new budget airline in Australia is having, is the base at Sunshine 358 00:27:21,720 --> 00:27:23,400 Coast Airport, right. 359 00:27:23,400 --> 00:27:27,520 And so what that means is that there is always a return trip going back at the end of the 360 00:27:27,520 --> 00:27:30,920 day because that is where the planes ultimately live, right. 361 00:27:30,920 --> 00:27:39,360 So the airport is just, in terms of the route development and the additional networks and 362 00:27:39,360 --> 00:27:44,480 routes that have been put on, it has been a real success story. 363 00:27:44,480 --> 00:27:50,040 The other part of Sunshine Coast Airport is the property redevelopment side and so it 364 00:27:50,040 --> 00:27:56,440 is not unusual that airports would have significant landings that they can use for commercial 365 00:27:56,440 --> 00:27:57,440 property. 366 00:27:57,440 --> 00:28:03,440 So one of the things, and we obviously went through a sort of heavy consultation process 367 00:28:03,440 --> 00:28:12,920 with Council and residents and etc. was the closing down of the north south runway freed 368 00:28:12,920 --> 00:28:17,120 up a lot of land that we will then be able to commercially develop. 369 00:28:17,120 --> 00:28:22,880 So that has been a sort of additional project that we have been working on at the airport 370 00:28:22,880 --> 00:28:24,600 to help diversify the revenue streams. 371 00:28:24,600 --> 00:28:28,840 You could remember that, and we saw this during COVID, right, it was a really tough time for 372 00:28:28,840 --> 00:28:33,640 the airport and you look at Sydney and Melbourne, those big capital city airports, they would 373 00:28:33,640 --> 00:28:39,400 have a not insignificant amount of their revenue from non aeronautical activities, right. 374 00:28:39,400 --> 00:28:43,320 And so that is what we are looking to do at Sunshine Coast is really to grow that non 375 00:28:43,320 --> 00:28:48,800 aero side of the revenue stream and that helps protect against future shocks that hopefully 376 00:28:48,800 --> 00:28:49,800 won't happen but may happen. 377 00:28:49,800 --> 00:28:54,120 Well it is a shame you don't do toll roads because when the planes weren't flying, I 378 00:28:54,120 --> 00:28:56,800 would love for you to fix that Bruce Highway. 379 00:28:56,800 --> 00:28:57,800 Yeah, right. 380 00:28:57,800 --> 00:29:04,000 Bruce Highway is always a pain in the existence of trying to head up there. 381 00:29:04,000 --> 00:29:06,280 So yes, it is great to hear about the Sunshine Airport. 382 00:29:06,280 --> 00:29:11,400 So as you said, COVID happens, planes aren't flying, the portfolio is diversified. 383 00:29:11,400 --> 00:29:15,680 So what other asset classes or sub asset classes are in the portfolio? 384 00:29:15,680 --> 00:29:22,240 Yeah I mean one of the great things about the market and again I think you can see this 385 00:29:22,240 --> 00:29:30,640 in our portfolio is that you do get a good exposure to a lot of different sectors within 386 00:29:30,640 --> 00:29:32,720 the infrastructure asset class. 387 00:29:32,720 --> 00:29:34,800 Infrastructure is not a homogenous asset class. 388 00:29:34,800 --> 00:29:42,600 You've got everything from social infrastructure, PPPs which as I said are government availability 389 00:29:42,600 --> 00:29:44,080 cash flows. 390 00:29:44,080 --> 00:29:49,120 Essentially you get paid a quarterly payment for making the facility available as long 391 00:29:49,120 --> 00:29:53,000 as you meet certain KPIs, very low risk assets. 392 00:29:53,000 --> 00:29:58,600 Then going up through the risk spectrum you've got energy transmission generation, you've 393 00:29:58,600 --> 00:30:01,440 got ports and bulk liquids. 394 00:30:01,440 --> 00:30:08,360 So port side infrastructure like the big storage, the big white tanks that you see port side 395 00:30:08,360 --> 00:30:11,400 up to airports and then digital infrastructure as well. 396 00:30:11,400 --> 00:30:18,400 So from a risk return spectrum it is quite a varied number of opportunities and within 397 00:30:18,400 --> 00:30:24,800 our portfolio we've got exposure to most of those major sub sectors. 398 00:30:24,800 --> 00:30:30,840 Transport and energy are probably the two largest, not probably, they are the two largest 399 00:30:30,840 --> 00:30:36,560 exposures within the portfolio and they certainly going forward will be key focus areas for 400 00:30:36,560 --> 00:30:40,120 us to continue to build out along those sector lines. 401 00:30:40,120 --> 00:30:45,920 Digital infrastructure is probably the other area that we like and so typically we look 402 00:30:45,920 --> 00:30:50,600 to invest in sectors where they exhibit strong tailwinds and that we have expertise. 403 00:30:50,600 --> 00:30:55,280 That's sort of the two things that we're looking at and so if I were to sort of think 404 00:30:55,280 --> 00:31:00,120 about where this portfolio is going in future is very much transport and energy will continue 405 00:31:00,120 --> 00:31:05,240 to build out those sector lines but certainly digital infrastructure like fibre, data centres 406 00:31:05,240 --> 00:31:06,240 etc. 407 00:31:06,240 --> 00:31:13,640 When you say digital infrastructure like I've heard some places you know you buy a dam, 408 00:31:13,640 --> 00:31:18,600 the water essentially all the other standards like you need the water cools everything but 409 00:31:18,600 --> 00:31:20,360 you don't have to go offshore right. 410 00:31:20,360 --> 00:31:25,440 Is that something that you're looking at when you say digital infrastructure or are you 411 00:31:25,440 --> 00:31:27,640 saying something completely different? 412 00:31:27,640 --> 00:31:35,680 So digital infrastructure probably fits into three main assets in my view it's towers. 413 00:31:35,680 --> 00:31:44,960 Now towers are great assets but there's not many tower operators in Australia that would 414 00:31:44,960 --> 00:31:47,360 fall into the mid-market space. 415 00:31:47,360 --> 00:31:52,560 We've seen Telstra sell off their towers business, Optus sell off their towers business, 416 00:31:52,560 --> 00:31:54,920 Vodafone in New Zealand sell off their towers business. 417 00:31:54,920 --> 00:32:02,160 They've all been quite sort of extraordinarily large transactions with prices to sort of 418 00:32:02,160 --> 00:32:04,200 meet that. 419 00:32:04,200 --> 00:32:10,440 And so we do like towers as an asset but I think in terms of getting access to that in 420 00:32:10,440 --> 00:32:15,160 the mid-market could be challenging and so really when we talk about digital infrastructure 421 00:32:15,160 --> 00:32:19,840 the two main areas that we're looking at is fibre, so last mile fibre. 422 00:32:19,840 --> 00:32:28,280 We've just recently acquired a fibre business in the US and looking to roll out that network 423 00:32:28,280 --> 00:32:31,040 to other regions in the US. 424 00:32:31,040 --> 00:32:34,160 And then the other sector is data centres. 425 00:32:34,160 --> 00:32:47,800 So ultimately storage houses for large amounts of data and so that's something which we're 426 00:32:47,800 --> 00:32:49,040 yet to make an investment in. 427 00:32:49,040 --> 00:32:54,400 Yet it can be quite challenging to enter that market if you're not an incumbent player. 428 00:32:54,400 --> 00:32:59,600 But we've been certainly looking at a few opportunities and really the space that we're 429 00:32:59,600 --> 00:33:02,000 looking at in data centres is edge data centres. 430 00:33:02,000 --> 00:33:05,840 So you can sort of split it up into hyperscale which are your big data centres that sort 431 00:33:05,840 --> 00:33:09,840 of Amazon and Microsoft own and then you've got your edge data centres which are actually 432 00:33:09,840 --> 00:33:14,640 smaller data centres closer to the user. 433 00:33:14,640 --> 00:33:20,360 And so we feel that that fits more within our mid-market strategy. 434 00:33:20,360 --> 00:33:23,960 So what's the most recent acquisition in the portfolio? 435 00:33:23,960 --> 00:33:30,400 As you were saying, you find an opportunity and then essentially telling investors, you 436 00:33:30,400 --> 00:33:34,760 know, we have an opportunity to get into the fund to essentially purchase this particular 437 00:33:34,760 --> 00:33:35,760 asset. 438 00:33:35,760 --> 00:33:38,600 So what's the most recent acquisition? 439 00:33:38,600 --> 00:33:45,040 So the most recent acquisition is Windfarm, a windfarm called Stockyard Hill Windfarm 440 00:33:45,040 --> 00:33:47,080 which is down in Victoria. 441 00:33:47,080 --> 00:33:56,840 It is the largest windfarm in Australia at 528 megawatts so it's a big one. 442 00:33:56,840 --> 00:34:04,440 And really that investment is an extension of our existing renewable energy strategy 443 00:34:04,440 --> 00:34:10,280 that we've been undertaking for the last 10 or so years which is to build out a diversified 444 00:34:10,280 --> 00:34:13,600 platform of renewable energy assets. 445 00:34:13,600 --> 00:34:18,840 And so now that is our sixth asset in the portfolio. 446 00:34:18,840 --> 00:34:25,240 It takes our renewable energy generation portfolio to over 1.5 gigawatts. 447 00:34:25,240 --> 00:34:31,000 I heard the other day that that now makes Palisade the largest or it now makes the Palisade 448 00:34:31,000 --> 00:34:36,320 platform of renewable energy assets the largest in the country from an operational perspective. 449 00:34:36,320 --> 00:34:42,600 In terms of our renewable energy strategy, it really is about looking to grow out that 450 00:34:42,600 --> 00:34:47,520 sector and so I think particularly with renewable energy I feel that we're on the verge of a 451 00:34:47,520 --> 00:34:51,720 new build out of renewable energy in Australia. 452 00:34:51,720 --> 00:34:57,760 We went through in 2015, 2016 when we had this bipartisan support from the Labor and 453 00:34:57,760 --> 00:35:04,240 Liberal governments to put in place the renewable energy target which mandated renewable energy 454 00:35:04,240 --> 00:35:12,800 retailers and large users to purchase 20% of their energy needs from renewable sources. 455 00:35:12,800 --> 00:35:18,880 That spurred a huge build out of renewable energy from 2016 to 2020. 456 00:35:18,880 --> 00:35:22,120 We've then hit a bit of a lull the last couple of years and haven't did any favours in that 457 00:35:22,120 --> 00:35:30,120 respect but certainly the last 12 or so months we've seen a real push to further build out 458 00:35:30,120 --> 00:35:33,440 renewable energy in Australia particularly given our ageing coal fleet. 459 00:35:33,440 --> 00:35:37,720 So we're very excited about where we can take our renewable energy platform and as I said 460 00:35:37,720 --> 00:35:40,880 we've got a good starting point being one of the largest in the country. 461 00:35:40,880 --> 00:35:46,160 So with the portfolio as we said that Palisade is now one of the largest renewable energy 462 00:35:46,160 --> 00:35:48,440 asset holders so to speak. 463 00:35:48,440 --> 00:35:55,400 With wind farms one question that comes up quite a lot is the reliance on subsidies and 464 00:35:55,400 --> 00:36:01,440 there's some people argue that if tomorrow our subsidy wind farms evaporate like as you 465 00:36:01,440 --> 00:36:05,360 can see with the water rights there are no subsidies as an example right then essentially 466 00:36:05,360 --> 00:36:10,160 that extension of business may get impacted greatly. 467 00:36:10,160 --> 00:36:15,560 Is that a concern for you or more importantly how do you factor into dealing with that? 468 00:36:15,560 --> 00:36:17,680 What are your thoughts? 469 00:36:17,680 --> 00:36:24,080 So new build wind and new build solar are absolutely economic at the moment without 470 00:36:24,080 --> 00:36:30,880 subsidies so subsidies were brought in and the key form of the subsidy was the renewable 471 00:36:30,880 --> 00:36:36,880 energy target and large scale generation certificates right and that scheme runs out till 2030 and 472 00:36:36,880 --> 00:36:40,840 there's been no scheme put in place post 2030. 473 00:36:40,840 --> 00:36:44,360 It may be depending on sort of the actions of the government but at this point there's 474 00:36:44,360 --> 00:36:45,920 no scheme post 2030. 475 00:36:45,920 --> 00:36:53,600 Having said that if you were to go and build a new generation at this moment so if you 476 00:36:53,600 --> 00:36:59,240 had the requirement for one additional megawatt in the network the cheapest way to do that 477 00:36:59,240 --> 00:37:01,360 at the moment would be renewable. 478 00:37:01,360 --> 00:37:07,120 So coal, gas, you had all those options on the table ignoring any ESG impacts renewables 479 00:37:07,120 --> 00:37:12,760 is the cheapest form of new build generation at the moment right so this asset class can 480 00:37:12,760 --> 00:37:20,240 now and is now surviving without subsidies and so the way in which our investments are 481 00:37:20,240 --> 00:37:28,720 structured is we enter into long term off take agreements for our renewable energy assets 482 00:37:28,720 --> 00:37:35,600 so if we're out there working with a developer on a new renewable energy asset we will look 483 00:37:35,600 --> 00:37:42,400 to before we put any dollars in the ground we will look to ensure that we have a long 484 00:37:42,400 --> 00:37:46,640 term off take agreement in place and that could either be with Origin Energy and AGL 485 00:37:46,640 --> 00:37:50,680 and one of the big retailers it could be with a government a state government counterparty 486 00:37:50,680 --> 00:37:55,560 and we've got all of those counterparties now in our portfolio and we will look to contract 487 00:37:55,560 --> 00:38:00,920 that power out for 10, 15 years or whatever it may be. 488 00:38:00,920 --> 00:38:09,320 Now at the moment there is no subsidy attached to that contract right so at the moment the 489 00:38:09,320 --> 00:38:14,560 new build generation there are no subsidies being underwritten for the existing assets 490 00:38:14,560 --> 00:38:21,520 that we have in our portfolio we have obviously get the benefit of the subsidies through the 491 00:38:21,520 --> 00:38:28,960 large scale generation certificates that we sell but following 2030 there's no assumption 492 00:38:28,960 --> 00:38:34,360 in the model around that around those subsidies continuing right so I think it was early on 493 00:38:34,360 --> 00:38:39,960 when renewable energy was an emerging asset class it was probably right that the asset 494 00:38:39,960 --> 00:38:44,960 class couldn't survive without subsidies and we're seeing that with batteries at the moment 495 00:38:44,960 --> 00:38:51,800 right it's still probably at the margin if they are economic without subsidies but we've 496 00:38:51,800 --> 00:38:57,640 seen this extraordinary fall in technology costs for both wind and solar components and 497 00:38:57,640 --> 00:39:04,400 technology and that's basically made subsidies non-existent or not required because of that 498 00:39:04,400 --> 00:39:06,600 falling in technology costs. 499 00:39:06,600 --> 00:39:15,160 All the costs so the access to renewable, cheap, reliable energy is very very important 500 00:39:15,160 --> 00:39:20,000 for our society right and I agree with a lot of people when they say that we need to get 501 00:39:20,000 --> 00:39:25,760 clean but unfortunately you know life doesn't always work out the way that we want so there's 502 00:39:25,760 --> 00:39:31,600 also many people discussing that it might be a gradual step over the next 50 years so 503 00:39:31,600 --> 00:39:36,600 to speak and they're saying that you know if you look at natural gas that might be the 504 00:39:36,600 --> 00:39:41,200 least of all labels in the transition phase I think I saw in the portfolio that you have 505 00:39:41,200 --> 00:39:44,720 infrastructure exposure to the gas space is that still the case? 506 00:39:44,720 --> 00:39:53,360 Yeah it is and look we very much remain supportive of gas as a transition fuel we think it's 507 00:39:53,360 --> 00:39:59,480 absolutely fundamental to ensuring that we have an orderly transition to renewables and 508 00:39:59,480 --> 00:40:00,480 so. 509 00:40:00,480 --> 00:40:01,480 What's the asset? 510 00:40:01,480 --> 00:40:09,600 We have two gas pipelines in the portfolio and these gas pipelines they're similar in 511 00:40:09,600 --> 00:40:15,240 strategy in that one goes north and one goes south right so the one that goes south is 512 00:40:15,240 --> 00:40:20,680 our Tasmanian gas pipeline and that takes gas basically from the Bass Strait and from 513 00:40:20,680 --> 00:40:25,720 the Victorian sort of mainland down to down to Tassie and then the one that goes north 514 00:40:25,720 --> 00:40:30,080 takes gas from the Morumbar gas base and up to Townsville but very similar strategy in 515 00:40:30,080 --> 00:40:35,400 terms of the role that those pipelines play in that the one in the north connects into 516 00:40:35,400 --> 00:40:38,760 the Townsville power station the one in the south connects into the Tamar Valley power 517 00:40:38,760 --> 00:40:47,640 station in Tassie right and so they very much provide the role as providing security energy 518 00:40:47,640 --> 00:40:55,200 security to those regions when renewables or other forms of generation may not be available 519 00:40:55,200 --> 00:41:01,600 to provide power right so it's very much an energy security play and that just that just 520 00:41:01,600 --> 00:41:06,680 sort of further compounds the point that we do believe that gas has a role to play in 521 00:41:06,680 --> 00:41:11,960 an orderly transition to to renewables because at the moment battery storage is not going 522 00:41:11,960 --> 00:41:16,360 to be able to play the role of that firming power because you need firming power right 523 00:41:16,360 --> 00:41:19,840 the wind doesn't blow all the time obviously the sun doesn't shine at night time and so 524 00:41:19,840 --> 00:41:25,160 you need that complementary power and so batteries are just not at the point and probably 525 00:41:25,160 --> 00:41:29,120 will not be at the point where they can play that role to any large degree for several 526 00:41:29,120 --> 00:41:35,400 years and so we definitely think that gas has a continuing role to play in the EMG mix 527 00:41:35,400 --> 00:41:40,320 the other thing to mention as well is that you know gas is still required by industry 528 00:41:40,320 --> 00:41:45,720 for the sort of heating and other manufacturing purposes and at the moment electricity just 529 00:41:45,720 --> 00:41:51,800 cannot play that role so you know I think it's important to sort of remember that the 530 00:41:51,800 --> 00:41:56,040 gas has a dual role in the economy it's going to be a transition fuel but equally as well 531 00:41:56,040 --> 00:41:59,440 it is a fundamental part of manufacturing in Australia as well. 532 00:41:59,440 --> 00:42:02,800 That's what you're saying your team essentially looks for infrastructure that's difficult 533 00:42:02,800 --> 00:42:07,080 to be removed and you know it's going to be required for many generations to come right? 534 00:42:07,080 --> 00:42:08,080 That's right yeah. 535 00:42:08,080 --> 00:42:10,800 So speaking of the team how big is the team now? 536 00:42:10,800 --> 00:42:18,560 So the team is so we split our team into investment personnel and asset management personnel so 537 00:42:18,560 --> 00:42:24,800 in the investment team around 30 and in the asset management team that's close to 50 now 538 00:42:24,800 --> 00:42:32,040 so we've got a team in Australia around about 15, 20 and then we've actually got a team 539 00:42:32,040 --> 00:42:39,080 as well based in the UK who do a lot of our we've got an anaerobic digestion platform 540 00:42:39,080 --> 00:42:44,540 that we're building out in the UK and they work on that platform so it is a scalable 541 00:42:44,540 --> 00:42:50,840 team now and importantly you know we think it's a good mix to have both investment personnel 542 00:42:50,840 --> 00:42:56,320 but particularly the operational guys right so you know they are very much involved in 543 00:42:56,320 --> 00:43:02,400 the day-to-day running of these assets they don't turn the spanners but they manage the 544 00:43:02,400 --> 00:43:07,800 guys that turn the spanners right so you know we think it's really important that we sort 545 00:43:07,800 --> 00:43:13,320 of augment that sort of investment capability that we have with actual guys that sort of 546 00:43:13,320 --> 00:43:16,120 live and breathe these assets on the ground. 547 00:43:16,120 --> 00:43:21,080 Well having a good team is very very important and I suppose our clients one of the main 548 00:43:21,080 --> 00:43:27,600 questions they want to understand is essentially the behavioural psychology behind the alignment 549 00:43:27,600 --> 00:43:32,400 of the team and how they're remunerated as we know different remuneration structures 550 00:43:32,400 --> 00:43:36,640 is essentially you know create different outcomes. 551 00:43:36,640 --> 00:43:45,120 So how is the fee structure and bonus structure work at Palisade? 552 00:43:45,120 --> 00:43:47,040 Secondly is there a high watermark? 553 00:43:47,040 --> 00:43:48,040 What's the benchmark? 554 00:43:48,040 --> 00:43:50,880 Why is the benchmark chosen? 555 00:43:50,880 --> 00:43:53,440 And can you give a bit of an overview that would be great. 556 00:43:53,440 --> 00:44:01,760 Yeah sure so the alignment and the remuneration I think the key point is that 65% of Palisade 557 00:44:01,760 --> 00:44:08,880 is owned by staff right which is pretty powerful and that's consistent with the broader pinnacle 558 00:44:08,880 --> 00:44:15,520 model which is they take minority stakes in various affiliates and then provide back office 559 00:44:15,520 --> 00:44:24,320 support distribution you know HR etc. so it's consistent with the broader pinnacle model 560 00:44:24,320 --> 00:44:31,640 but what that model allows us to do is as an investment team we can focus on what we 561 00:44:31,640 --> 00:44:40,240 do best which is investing and managing assets and so fundamentally we are aligned through 562 00:44:40,240 --> 00:44:46,240 our ownership of Palisade and so very simply we have a short term incentive and a long 563 00:44:46,240 --> 00:44:51,160 term incentive at Palisade our short term incentive is funded out of the performance 564 00:44:51,160 --> 00:44:55,680 fees that we generate for the business and obviously those performance fees are linked 565 00:44:55,680 --> 00:45:00,680 to the performance of our clients portfolios and then we have a long term investment scheme 566 00:45:00,680 --> 00:45:07,880 which is the ability to participate in the equity of Palisade so there's that long term 567 00:45:07,880 --> 00:45:13,960 alignment and there's also best in provisions as well so you know heaven forbid if we decide 568 00:45:13,960 --> 00:45:18,680 to leave you're always leaving you're always leaving something on the table which is good 569 00:45:18,680 --> 00:45:24,880 it's a good tool to ensure that people sort of remain with the business as a retention 570 00:45:24,880 --> 00:45:33,760 tool but and then also we've had several team members invest their own personal capital 571 00:45:33,760 --> 00:45:41,880 as well into into Palisade as well and you know I think having that LTI is is really 572 00:45:41,880 --> 00:45:48,280 powerful but when you actually put your own personal capital into the business it really 573 00:45:48,280 --> 00:45:53,240 sort of sharpens the mind in terms of wanting to ensure that you you are really delivering 574 00:45:53,240 --> 00:45:56,880 the best outcomes for your clients because it's your own personal money at risk as well 575 00:45:56,880 --> 00:46:03,040 so you know I think the the incentive regime that we've got at Palisade is it strikes 576 00:46:03,040 --> 00:46:12,400 right balance of fairness of alignment and and retention as well in terms of how performance 577 00:46:12,400 --> 00:46:20,080 fees are structured across the business you're absolutely right it's a high watermark and 578 00:46:20,080 --> 00:46:24,560 if there is underperformance against that high watermark then we need to catch up to that 579 00:46:24,560 --> 00:46:29,000 to that high watermark again before we can start generating performance fees fortunately 580 00:46:29,000 --> 00:46:35,960 when we're not in that position where where we're underwater so what is the benchmark 581 00:46:35,960 --> 00:46:42,760 so the benchmark is a is a bonds plus a margin benchmark so on the on the diversified funds 582 00:46:42,760 --> 00:46:51,640 it's bonds plus five percent and why was that chosen why was that chosen look I think there's 583 00:46:51,640 --> 00:46:57,000 probably there's probably three main benchmarks you can choose within within infrastructure 584 00:46:57,000 --> 00:47:03,920 one is a a CPI plus benchmark and sort of that makes sense given the the natural sort 585 00:47:03,920 --> 00:47:09,880 of linkages to inflation one is a fixed benchmark so you know seven percent eight percent is 586 00:47:09,880 --> 00:47:14,240 not is not unusual in the current market and then the others which we've seen is obviously 587 00:47:14,240 --> 00:47:19,320 a bonds plus benchmark now in terms of why that was chosen look I think you know infrastructure 588 00:47:19,320 --> 00:47:26,080 being you know we spoke before about being that defensive asset class you know I don't 589 00:47:26,080 --> 00:47:33,240 agree with this but people have often referred to infrastructure as a proxy for bonds given 590 00:47:33,240 --> 00:47:38,680 the defensive nature of the asset class I I can see why people say that but personally 591 00:47:38,680 --> 00:47:42,640 I don't I don't agree with that but isn't that the argument essentially with COVID that 592 00:47:42,640 --> 00:47:46,040 you know commercial properties never come off and ever and then all of a sudden you 593 00:47:46,040 --> 00:47:50,440 have a supply side shut down and nothing happens for two years and that's right so COVID did 594 00:47:50,440 --> 00:47:56,080 a lot of things to us classes which people never expected but when I get concerned people 595 00:47:56,080 --> 00:48:02,080 say oh this has never happened this will never happen going forward yeah yeah but but anyway 596 00:48:02,080 --> 00:48:10,120 so so I think you know in that regard there's a there is a sensibility to having a sort 597 00:48:10,120 --> 00:48:14,120 of bonds plus a margin benchmark for infrastructure and that's ultimately what was chosen for 598 00:48:14,120 --> 00:48:20,080 our fund you know 15 or so years ago that's been the benchmark since and you know we think 599 00:48:20,080 --> 00:48:25,760 it we think it provides a sort of good level of sort of alignment and and and performance 600 00:48:25,760 --> 00:48:31,160 benchmark for the time that's really good to get an understanding of so is there any 601 00:48:31,160 --> 00:48:41,040 thoughts you want to leave our listeners and clients with look I think the beauty about 602 00:48:41,040 --> 00:48:46,880 one of the things I like about infrastructure is you can it's real right I know it's real 603 00:48:46,880 --> 00:48:51,960 asset right but you can see and touch it you can experience it I experienced it last week 604 00:48:51,960 --> 00:48:58,920 in in Noosa when I flew into Sunshine Coast Airport I hate to admit it's actually my first 605 00:48:58,920 --> 00:49:03,840 time on the new runway even though it's been built for two years yeah so slap on the wrist 606 00:49:03,840 --> 00:49:11,320 for me but but like it was it was fantastic it was a it's a really great airport now and 607 00:49:11,320 --> 00:49:16,400 you know I think it's we're turning our minds now to a terminal redevelopment for that for 608 00:49:16,400 --> 00:49:20,120 that airport and so I think it's going to be really really exciting but that's just 609 00:49:20,120 --> 00:49:26,120 one example in the portfolio where you know you can actually visit you can experience 610 00:49:26,120 --> 00:49:31,640 our our assets you know I was in Gold Coast last year with with the family and we we had 611 00:49:31,640 --> 00:49:36,200 a ride on the we had a ride on the tram and and that's something that we've that's something 612 00:49:36,200 --> 00:49:42,200 that we funded right so it is it is nice from that perspective to be able to see and touch 613 00:49:42,200 --> 00:49:46,640 and experience assets that you're that you're invested in and I think the beauty with our 614 00:49:46,640 --> 00:49:53,200 portfolio is that you know we don't just have capital city infrastructure given our mid-market 615 00:49:53,200 --> 00:49:58,600 focus we are very heavily invested in regional Australia as well so you know we've obviously 616 00:49:58,600 --> 00:50:03,920 got our our renewable portfolio which which you know given the nature of those assets 617 00:50:03,920 --> 00:50:07,840 are in regional communities but we've also got Port of Portland in in sort of regional 618 00:50:07,840 --> 00:50:14,080 Victoria we've got our livestock exchange agri infrastructure business in in regional 619 00:50:14,080 --> 00:50:19,080 Australia so it's quite nice that we're able to sort of touch sort of various various sort 620 00:50:19,080 --> 00:50:23,400 of communities with Australia and that that's really important to us as a as an infrastructure 621 00:50:23,400 --> 00:50:31,040 owner is you know working closely with the with the communities because a lot of the 622 00:50:31,040 --> 00:50:36,800 a lot of the communities that our assets exist in you know they rely very heavily and on 623 00:50:36,800 --> 00:50:43,920 that on that on those assets to to be able to to to live right so it is it's a it's 624 00:50:43,920 --> 00:50:49,280 a nice you know from that perspective it's a it's a it's a nice it's a nice sort of 625 00:50:49,280 --> 00:50:53,240 investment to be to be making but you know I think if I could sum up the strategy in 626 00:50:53,240 --> 00:50:58,760 one word it's it's access to a high quality portfolio of mid-market infrastructure assets 627 00:50:58,760 --> 00:51:05,360 that have both defensive characteristics but also good levels of capital growth and and 628 00:51:05,360 --> 00:51:07,680 good income yields as well. 629 00:51:07,680 --> 00:51:11,800 If anyone wants to learn more about the strategy and the team how can they reach? 630 00:51:11,800 --> 00:51:19,120 Pinnacle do a great job with us as our distribution partner so you can either reach out to someone 631 00:51:19,120 --> 00:51:25,720 on the Pinnacle team their details are on the website or please look me up on the Palisade 632 00:51:25,720 --> 00:51:28,240 website and I'll be happy to assist as well. 633 00:51:28,240 --> 00:51:31,280 Fantastic Andrew thank you very much for your time it's been really really interesting. 634 00:51:31,280 --> 00:51:32,480 Thanks Murdoch, my pleasure. 635 00:51:32,480 --> 00:51:33,480 Have a good day. 636 00:51:33,480 --> 00:51:43,720 Any views expressed in this recording do not represent a view of any other third party 637 00:51:43,720 --> 00:51:46,400 and other sole personal opinions of the speaker. 638 00:51:46,400 --> 00:51:50,400 Any reference to financial product does not constitute advice or recommendation and before 639 00:51:50,400 --> 00:51:54,360 any action you should seek proper advice from your financial professional. 640 00:51:54,360 --> 00:52:01,200 Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial 641 00:52:01,200 --> 00:52:02,200 advice. 642 00:52:02,200 --> 00:52:07,920 To get in touch with York head to our website www.yorkwealth.com.au