Hi, I'm Murdoch Gaddy and thanks for listening to the Rate of Change with York Wealth Management.
The Rate of Change is a podcast which explores the ever-shifting momentum of financial markets
through the eyes of the leading managers in wealth management.
In today's broadcast, I'm joined by Andrew Killesteyn, the portfolio manager at Palisade
Investment Partners to discuss the Palisade Infrastructure Fund and their infrastructure
trust plus the other funds.
Andrew defines the infrastructure universe, discusses why they look only at particular
Australian mid-tier infrastructure assets to invest in and highlights the importance
of these assets in the community.
According to the January 2023 Fund Fact Sheet, the trust targets income and growth whilst
their average return was 9.8% for the past 12 months, 8.5% for the past three years,
and 5.1% for five years, and they've averaged 9% since inception.
We dive into most of the assets such as airports, wind farms, gas pipelines, ports, plus others,
and I found the conversation on the Sunshine Airport quite interesting.
He discusses everything from why they look for these assets to how the tender process
works to acquire these assets.
I really enjoyed his insights into the Australian infrastructure universe, so please remember
to listen to the disclaimer at the end of the broadcast and keep your feedback coming.
You can reach me at mgatty at ywm.com.au.
And with that being said, I hope you enjoyed this conversation as much as I did, so sit
back, relax, and enjoy it.
Andrew Killestone, welcome to the Rate of Change with your cloth management.
Thank you, Murdoch.
Great to be here.
Absolutely.
Why don't we kick things off, and can you give everyone a bit of an idea of how you
got into financial markets, a bit of your background, and a bit about yourself?
Yeah, sure.
So I'm a Canberra boy originally, and at university I did economics and commerce, and so when
I finished uni I had the choice of either being an accountant, an investment banker,
or an economist.
And so I got a job offer from Deloitte in Canberra at the time and sort of went down
the accountancy path and I think pretty quickly worked out that my heart lied in finance.
And so I had a couple of friends actually that were at Macquarie and applied for the
Macquarie graduate program in Sydney, and fortunately I was lucky enough to be offered
a role there and went into their infrastructure funds business back in 2005.
And if you recall back then, that was around the time that real private investment in infrastructure
was taking off in Australia.
And if you can recall those three massive listed satellite funds, Macquarie Airports,
Macquarie Infrastructure Group, which was the Rhodes Fund, and Macquarie Communications
Group, they were the big three funds at the time.
And it was great to get exposure to sort of what was undoubtedly the leader in infrastructure
investment at the time in Macquarie.
So how did Macquarie lead to Palisade?
So I left Macquarie in 2012 and really that was around sort of trying something new.
So I then went to JAR, which is one of the asset consultants, one of the leading institutional
asset consultants in Australia, and headed up their direct investments business, which
was advising a lot of superannuation clients on direct investments into infrastructure
projects.
I was there for about three years and then was lucky enough to move over to Palisade
to sort of head up their portfolio function as to function.
So I've been there for the last six years and loving it.
So before we get into the details of Palisade, which everyone's interested in, the infrastructure
space is quite an interesting one, especially what's happened in the past couple of decades.
Can you give everyone a bit of an idea of what exactly is the infrastructure universe
in your opinion?
Yeah, so infrastructure is a set of assets that fundamentally these assets are essential
for the efficient functioning of an economy, right?
So we're talking about airports, ports, electricity generation, energy transmission distribution.
Digital infrastructure is somewhat of a merging asset class.
It was emerging pre-COVID, but certainly the onset of COVID and the working from home and
remote working sort of accelerated obviously data usage in the world.
And so digital infrastructure is certainly one of those asset classes which is emerging
more quickly than others.
But ultimately, from a business sense and a business characteristic sense, infrastructure
is very much monopolistic in nature, high barriers to entry.
And so what that means from a investment fundamentals point is that it is often seen as a defensive
asset class within a broader portfolio.
And coupled with that, you do get strong and stable income yields.
And so, you know, what role does unlisted infrastructure play in a broader portfolio?
You know, I think the key really is that it's a non-correlated strategy to more traditional
asset classes and provides that sort of balancing effect for the portfolio.
Okay, so that's essentially the universe.
So what's Palisades' approach and their investment philosophy?
And I suppose, as you said, you've been, Macquarie, you've seen how they kick this all off.
So I'm actually really interested into why is what Palisades doing different?
You know, what's their niche?
So we are very much about mid-market infrastructure.
And that's been a very deliberate focus of ours since we started back in 2008.
And really at the time there, we saw a gap in the market.
Obviously, large cap infrastructure at the time was very well banked, right?
So you think about your large capital city airports and ports, there was significant
amount of capital investing in those projects and a significant amount of interest.
Mid-infrastructure, on the other hand, was relatively untouched at that point in time.
And when we talk about mid-market, we're talking about assets that are lower down on the size
spectrum and people often ask me, what size investments are you targeting?
It can be quite hard to answer that because each sector is slightly different.
But if we were to put a number on it, you know, we're generally looking at assets of
$500 million enterprise value, you know, up to a billion dollars, a billion dollars would
be a big transaction for us.
And so our approach is very much targeting that mid-market space.
Now, why do we like that space?
It's really two reasons.
The first is simply down to demand and supply in that we believe and I think our portfolio
is evidence of this that there is an abundance of mid-market assets for investment in the
Australian market.
When you compare that to the large cap space, you know, can be, the pipeline can be more
driven by whatever the privatised notion of genders of the state governments may be at
a particular point in time.
So we very much believe there is a greater supply of assets in the mid-market.
And then on the demand side, if you think about the traditional investors into infrastructure,
that's been your Australian superannuation funds, your offshore pension funds, your offshore
sovereign wealth funds, who have significant amounts of capital to invest and they're generally
the ones that have been pushed up prices, particularly in that large cap space, right?
We don't tend to see those larger investors in the mid-cap space just because of the scalability
of mid-market compared to large cap.
And so simply from a demand-supply dynamic, we believe there's better pricing available
in the mid-market and that results in better risk-adjusted returns for investors.
The other reason why we like the mid-market is around control, right?
So any infrastructure manager will tell you that they have an active approach to asset
management and we do as well.
We will tell you that.
Now, what does that practically mean for us?
That means that given the size of the assets that we're acquiring, we are generally able
to, between our fund and our co-investment partners, able to acquire majority stakes
in assets, if not 100% of assets.
And what that means is that we're able to work very closely with the management teams
of those underlying assets to drive value for investors.
How does the unlisted work differently to the listed infrastructure funds in the market?
What's the pros and cons?
Yeah, I mean, with listed, you're ultimately buying a small stake in a company, right?
And so you're very much, with listed infrastructure, is very much about the analysis of the stock
itself and whether it's underpriced or overpriced and what that means for your portfolio.
Obviously, with listed infrastructure, you are subject to market noise.
And I think a lot of people probably won't realise, or maybe they do realise, that they
would already have exposure to listed infrastructure, probably through their equities portfolios.
In Australia, the listed infrastructure universe isn't big, right?
So I think people have already got exposure to listed infrastructure in their portfolios
already.
When you look at unlisted infrastructure, it's very much a different mindset.
It's an active approach to asset management.
You don't get that volatility, right?
So all of our assets are independently valued.
And we can see, and we've got some charts that we can show investors that you can see
that the drawdown or the negative return in any period for our strategy versus listed
strategies is markedly different, right?
So I think the key difference between unlisted and unlisted is around that stability point
of returns and not necessarily subject to market cycles.
I won't go into an argument of whether listed or unlisted is better.
There have been numerous papers put out by managers on both sides and they're very self-serving,
let's say, on sort of which is the better strategy.
So we'll leave that argument for another time.
Well, I can just say from my perspective that they're tools in order to get a job done.
Some work better in some macro environments from a liquidity standpoint, whilst others,
if things turn ugly, you can get hurt quite badly, whilst the other vehicle can weather
the storm quite well.
So you'd probably agree that the different vehicle may be more of a choice based on what's
currently happening on a macro standpoint than on the micro.
That's right.
It comes down to investor objectives and their need for liquidity, their tolerance for volatility
as well.
Yeah, exactly.
Well, look, the reason why we're here today is I really want to get a better understanding
of what investment opportunities Palisades is currently offering.
Our understanding, and what we're going to learn about, is specifically on the infrastructure
of funds.
So what vehicles are currently available, what's their mandates, and why have they been
structured in that way?
Yeah, sure.
So with respect to, so we have three vehicles across the business.
Our diversified fund, which is our flagship open-ended fund.
So it has exposure to 25-odd assets in the portfolio already, and that fund will continue
to grow over time and will continue to invest along the various sector lines within that
fund.
So that's our institutional fund, and that's where the majority of our institutional investors
come through, like our superannuation funds and insurance clients.
We then have a specialised renewable energy fund and social infrastructure fund, social
infrastructure PPP fund, which are a government availability-style cash flows.
Now, those two funds are funds in their own right, and they're more for investors who
want specific exposure to those particular sectors.
But also our diversified fund invests in those funds as well, and that's how the diversified
fund gets its exposure to renewable energy and to social infrastructure PPPs.
So I think when we're offering our strategy to clients, very much the majority goes through
our diversified offering because that provides exposure to ultimately everything that we
do as a business.
And so for the wholesale market, we have set up a specific wholesale feeder fund that invests
into the diversified fund.
So whenever investors invest into that feeder fund, they will not only get access to all
future investments that we make through the fund, they'll also get access to the assets
and the track record that we've built up over the last 15 years and the existing assets
within the fund.
Okay.
So how much money is currently in those structures?
So in the diversified fund, that's currently a $1.6 billion fund.
I think it should reach $2 billion fairly shortly, given the pipeline of opportunities
that we're looking at.
Within the feeder fund itself, we raised around $300 million.
So that feeder fund is a meaningful part of our diversified institutional fund.
And that feeder fund just sits alongside our other institutional investors within that
institutional fund.
So with new capital coming in, do you take capital at any point in time and then let
it sit there and wait for an opportunity?
Or do you try to get the deal first and then fund it?
Can you give a bit of colour around that?
It's a very good question and it is a fine balance.
Obviously unlisted infrastructure is an asset class where it can be quite opportunistic.
So we can sometimes go six months, even 12 months without doing a transaction because
sometimes these transactions have a long gestation period in terms of either working with partners
or developers or whatever it may be to bring a project to fruition.
On the other hand, and this is sort of the experience that we've had of late, we can
do three transactions in three months.
So it just really depends.
So for that reason, we've tried to match as best as possible raising capital in the fund
to meet those transactions.
So in answer to your question, no, the fund isn't open all the time because we don't want
a situation where people invest capital and then that capital fits there without a home.
And before we get into the really interesting part, learning exactly how the mechanics of
that all work, how's the performance been?
What are you targeting?
I believe you have an income target and then the second one, a growth component.
How's that work?
Yeah, I mean, performance has been good.
If we look at the 12-month numbers, generally we're targeting high single digit net total
returns on this strategy.
I think the numbers over the last 12 months were 9.8%.
So we're at the higher end of that return target.
And then from a yield perspective, remembering my comments earlier that this is a, some consider
it an asset class, but sort of without getting into an argument of whether it's defensive
or growth, undoubtedly this is an asset class that produces stable income yields.
Why don't we use the phrase, it's uncorrelated to some market volatility.
That sounds good.
And so generally we're targeting yields of 5 to 6%.
And certainly that's what we've been able to deliver the last 12 months.
I think what's more pleasing though is the returns that we've been able to generate
over the long-term.
And so our 10-month returns are currently sitting at around 11% total return net and
around about 6% yield.
So I think in some ways that is the more pleasing number for us rather than the sort of 12-month
and 6-month returns more recently.
So staying on the returns for a second, how were the returns impacted in a rate environment
that pretty much went nearly to zero?
And we've had probably the most aggressive round of rate we've seen in such a shorter
period.
Does the fund, the investment vehicles benefit from an uplift in the cash rate?
If I had a penny for every time I've been asked, how do you expect infrastructure valuations
to perform in this latest market?
So I think it's important to think about how understated infrastructure is valued.
It's valued typically on a discounted cash flow basis.
These are very stable assets with predictable cash flows.
And so it's not unusual that assets are valued using a 30-, 40-, 50-year cash flow model.
And so one element of evaluation is the forecast cash flows.
And then the other element of evaluation is the discount factor, the discount rate for
those cash flows.
Now all of our assets are independently valued.
And our independent valuers take us through the cycle approach to determining what an
appropriate discount rate is.
So in the last 10 years, we've had a period of significant falling bond yields.
We did not see discount rates fall in lockstep with those bond yields.
And equally, we did not expect and we have not seen discount rates increase in lockstep
with bond yields.
So I'll be sitting here saying that discount rates might go up.
No, I think there's definitely upward pressure to discount rates.
Will they go up materially?
No, I don't think so.
The other side of the coin though is that remembering that this asset class, and in
particular this fund, has strong CPI correlation.
So our CPI correlation across the portfolio is 0.8.
So what that means is that if there's a 1% increase in CPI above our expectations, that
results in a 0.8% increase in the value of the portfolio.
So very strong inflation correlation in the portfolio.
And so the other side of the coin on valuations is that if there's high bond yields that are
being implemented to target high inflation, that's actually a benefit for our portfolio.
And we've seen this play out the last six or 12 months whereby the portfolio has actually
performed really well because it has benefited from high inflation because of the pass through
that because a lot of the underlying assets, they have inflation escalators in the underlying
contracts.
Well, I have to dig into this a bit.
So inflation has been up now, essentially I think the research we're getting from the
states says 80% of all central banks globally are currently in a tightening phase.
Funny enough, China, first one to crash, maybe the first one coming out of this mess and
it's benefiting the high-end law sector.
But if everyone's tightening to essentially put a lid on inflation, and there's an argument
that our good old central banks and governments present to either do a handbrake turn north
or south, or I think the expression running around town is project break everything.
If that's their intention to essentially drive it from a disinflation environment into a
deflation environment, which hasn't been any in like 70 years, how's that going to impact
an investment vehicle, which as you said, benefits on a 0.8% correlation to the movement
in inflation?
To be fair, we're fairly agnostic to what happens with inflation.
The key for us is ensuring that we have inflation protection in the portfolio to ensure that
real returns of investors are preserved.
So if inflation goes down and there's a big tightening cycle, then the reverse happens
and we expect to see benefits in other parts of the portfolio.
Discount rates will likely come down a little bit.
Again, they won't go down in lockstep because of the through the cycle approach that the
valuers look at, but there'll be less upward pressure on discount rates and lower discount
rates pushes values up.
So I think it's very important to consider both sides of the coin with respect to the
discount factor that's applied to valuations and the CPI linkage.
As I said, we're not necessarily investing for a high inflationary environment.
We just want to ensure that real returns are protected within the portfolio.
That makes a lot of sense.
Well, let's talk about these specific assets in the portfolio.
Maybe to give everyone a bit of color, let's talk about the Sunshine Airport.
The reason I want to talk about this is both personal and I find it very interesting.
I heard you just got back from the USRA as well.
I did, yes.
How good is it in the USRA?
Very good, very good.
Particularly when you don't have kids.
Sorry, I do have kids, but I left them at home.
Yeah, look, my grandparents retired there about 30 years ago.
So I think I was very, very lucky to be introduced to a beautiful wilderness caravan park before
turning the mecca that it is today.
I heard you guys were discussing that Sydney Airport is now the fastest growing airport
in Australia.
Sunshine Coast Airport.
Sorry, yeah, the Sunshine Coast Airport.
Is that still the case?
Yeah, it's one of, I won't say it's the fastest because I haven't seen the latest numbers,
but certainly it is one of the fastest growing airports.
And I mean, Sunshine Coast is one of the fastest growing regions in Australia as well, which
obviously then translates into traffic that goes through that airport.
So it's not just airports in the portfolio, but let's just look at that.
Because what I want to understand is the start to finish of how's the tender process works,
how do you identify this as you hit mid-market?
Once you have the asset, how do you ascertain what needs to be improved?
We're talking about a new runway, is it going to turn the airport businesses itself, you
know, you went from just having a couple of dodgy cafes, which we love, to essentially
being like a stockland or a mini Westfield internally with all these fantastic stores.
What's the, so to repeat myself, the tender process, how do you identify fixing things,
how do you manage the business and what's the looking forward?
Yeah, so this transaction started with a tender process that the Sunshine Coast Council put
out at the time and, you know, at the time we had good experience in airports, so we
already had Darwin and Alice Springs airports in our portfolio.
And if you think about Darwin, you know, it is a little bit of a similar story in that
we've just taken that airport through a redevelopment, a terminal redevelopment, and so there are
a lot of credentials that we could put on the table to the Sunshine Coast Council to
show them that we would be an appropriate partner to drive this airport going forward.
And it is very much a partnership with the Council, it's not as though they sell the
asset and then walk away.
Obviously they are heavily invested in ensuring that the service that is being provided at
the airport continues to be top class so they can attract visitors to their region.
So it is very much a partnership that we have with Council there, but during the process,
you know, we obviously did our due diligence, doing due diligence on an airport takes a
long time and we went through that process in terms of looking at traffic forecasts and
ultimately we were selected as the preferred partner for the Council to then sort of own
the airport and manage the airport.
Now a really key part of this transaction was the new runway, right, so the existing
runway that was at Sunshine Coast Airport was a north-south runway along the beach.
I don't know the exact stat but there are a lot of aborted landings because of the crosswinds,
right, and so the Sunshine Coast Council always had this project plan of building a new two
and a half kilometre runway out to the north-west and that does two things, it means that the
crosswinds are not an issue anymore but it means that it is able to attract larger aircraft
as well and that was really the key with Sunshine Coast Airport is it is a huge catchment area,
Sunshine Coast, 500,000 people catchment area, right.
Now a lot of that catchment was being lost to Brisbane Airport because of the availability
of flight, there was not a huge amount of flights available at Sunshine Coast Airport.
So one of the first things that we did when we got in there and with the new owners is
spend a lot of time working with the airlines and showing the benefits of the region, communicating
with them about the new runway and ultimately with a view to attract the airlines and further
routes to the airport, right.
So the new runway was completed 2020 I believe and since we have acquired the airport there
was a Sydney and a Melbourne service, I think there was one Adelaide service and a seasonal
New Zealand service, since that time we have added a Cairns service, a new Carson service,
a Canberra service and additional Melbourne service.
We have now got Bonza, the new budget airline in Australia is having, is the base at Sunshine
Coast Airport, right.
And so what that means is that there is always a return trip going back at the end of the
day because that is where the planes ultimately live, right.
So the airport is just, in terms of the route development and the additional networks and
routes that have been put on, it has been a real success story.
The other part of Sunshine Coast Airport is the property redevelopment side and so it
is not unusual that airports would have significant landings that they can use for commercial
property.
So one of the things, and we obviously went through a sort of heavy consultation process
with Council and residents and etc. was the closing down of the north south runway freed
up a lot of land that we will then be able to commercially develop.
So that has been a sort of additional project that we have been working on at the airport
to help diversify the revenue streams.
You could remember that, and we saw this during COVID, right, it was a really tough time for
the airport and you look at Sydney and Melbourne, those big capital city airports, they would
have a not insignificant amount of their revenue from non aeronautical activities, right.
And so that is what we are looking to do at Sunshine Coast is really to grow that non
aero side of the revenue stream and that helps protect against future shocks that hopefully
won't happen but may happen.
Well it is a shame you don't do toll roads because when the planes weren't flying, I
would love for you to fix that Bruce Highway.
Yeah, right.
Bruce Highway is always a pain in the existence of trying to head up there.
So yes, it is great to hear about the Sunshine Airport.
So as you said, COVID happens, planes aren't flying, the portfolio is diversified.
So what other asset classes or sub asset classes are in the portfolio?
Yeah I mean one of the great things about the market and again I think you can see this
in our portfolio is that you do get a good exposure to a lot of different sectors within
the infrastructure asset class.
Infrastructure is not a homogenous asset class.
You've got everything from social infrastructure, PPPs which as I said are government availability
cash flows.
Essentially you get paid a quarterly payment for making the facility available as long
as you meet certain KPIs, very low risk assets.
Then going up through the risk spectrum you've got energy transmission generation, you've
got ports and bulk liquids.
So port side infrastructure like the big storage, the big white tanks that you see port side
up to airports and then digital infrastructure as well.
So from a risk return spectrum it is quite a varied number of opportunities and within
our portfolio we've got exposure to most of those major sub sectors.
Transport and energy are probably the two largest, not probably, they are the two largest
exposures within the portfolio and they certainly going forward will be key focus areas for
us to continue to build out along those sector lines.
Digital infrastructure is probably the other area that we like and so typically we look
to invest in sectors where they exhibit strong tailwinds and that we have expertise.
That's sort of the two things that we're looking at and so if I were to sort of think
about where this portfolio is going in future is very much transport and energy will continue
to build out those sector lines but certainly digital infrastructure like fibre, data centres
etc.
When you say digital infrastructure like I've heard some places you know you buy a dam,
the water essentially all the other standards like you need the water cools everything but
you don't have to go offshore right.
Is that something that you're looking at when you say digital infrastructure or are you
saying something completely different?
So digital infrastructure probably fits into three main assets in my view it's towers.
Now towers are great assets but there's not many tower operators in Australia that would
fall into the mid-market space.
We've seen Telstra sell off their towers business, Optus sell off their towers business,
Vodafone in New Zealand sell off their towers business.
They've all been quite sort of extraordinarily large transactions with prices to sort of
meet that.
And so we do like towers as an asset but I think in terms of getting access to that in
the mid-market could be challenging and so really when we talk about digital infrastructure
the two main areas that we're looking at is fibre, so last mile fibre.
We've just recently acquired a fibre business in the US and looking to roll out that network
to other regions in the US.
And then the other sector is data centres.
So ultimately storage houses for large amounts of data and so that's something which we're
yet to make an investment in.
Yet it can be quite challenging to enter that market if you're not an incumbent player.
But we've been certainly looking at a few opportunities and really the space that we're
looking at in data centres is edge data centres.
So you can sort of split it up into hyperscale which are your big data centres that sort
of Amazon and Microsoft own and then you've got your edge data centres which are actually
smaller data centres closer to the user.
And so we feel that that fits more within our mid-market strategy.
So what's the most recent acquisition in the portfolio?
As you were saying, you find an opportunity and then essentially telling investors, you
know, we have an opportunity to get into the fund to essentially purchase this particular
asset.
So what's the most recent acquisition?
So the most recent acquisition is Windfarm, a windfarm called Stockyard Hill Windfarm
which is down in Victoria.
It is the largest windfarm in Australia at 528 megawatts so it's a big one.
And really that investment is an extension of our existing renewable energy strategy
that we've been undertaking for the last 10 or so years which is to build out a diversified
platform of renewable energy assets.
And so now that is our sixth asset in the portfolio.
It takes our renewable energy generation portfolio to over 1.5 gigawatts.
I heard the other day that that now makes Palisade the largest or it now makes the Palisade
platform of renewable energy assets the largest in the country from an operational perspective.
In terms of our renewable energy strategy, it really is about looking to grow out that
sector and so I think particularly with renewable energy I feel that we're on the verge of a
new build out of renewable energy in Australia.
We went through in 2015, 2016 when we had this bipartisan support from the Labor and
Liberal governments to put in place the renewable energy target which mandated renewable energy
retailers and large users to purchase 20% of their energy needs from renewable sources.
That spurred a huge build out of renewable energy from 2016 to 2020.
We've then hit a bit of a lull the last couple of years and haven't did any favours in that
respect but certainly the last 12 or so months we've seen a real push to further build out
renewable energy in Australia particularly given our ageing coal fleet.
So we're very excited about where we can take our renewable energy platform and as I said
we've got a good starting point being one of the largest in the country.
So with the portfolio as we said that Palisade is now one of the largest renewable energy
asset holders so to speak.
With wind farms one question that comes up quite a lot is the reliance on subsidies and
there's some people argue that if tomorrow our subsidy wind farms evaporate like as you
can see with the water rights there are no subsidies as an example right then essentially
that extension of business may get impacted greatly.
Is that a concern for you or more importantly how do you factor into dealing with that?
What are your thoughts?
So new build wind and new build solar are absolutely economic at the moment without
subsidies so subsidies were brought in and the key form of the subsidy was the renewable
energy target and large scale generation certificates right and that scheme runs out till 2030 and
there's been no scheme put in place post 2030.
It may be depending on sort of the actions of the government but at this point there's
no scheme post 2030.
Having said that if you were to go and build a new generation at this moment so if you
had the requirement for one additional megawatt in the network the cheapest way to do that
at the moment would be renewable.
So coal, gas, you had all those options on the table ignoring any ESG impacts renewables
is the cheapest form of new build generation at the moment right so this asset class can
now and is now surviving without subsidies and so the way in which our investments are
structured is we enter into long term off take agreements for our renewable energy assets
so if we're out there working with a developer on a new renewable energy asset we will look
to before we put any dollars in the ground we will look to ensure that we have a long
term off take agreement in place and that could either be with Origin Energy and AGL
and one of the big retailers it could be with a government a state government counterparty
and we've got all of those counterparties now in our portfolio and we will look to contract
that power out for 10, 15 years or whatever it may be.
Now at the moment there is no subsidy attached to that contract right so at the moment the
new build generation there are no subsidies being underwritten for the existing assets
that we have in our portfolio we have obviously get the benefit of the subsidies through the
large scale generation certificates that we sell but following 2030 there's no assumption
in the model around that around those subsidies continuing right so I think it was early on
when renewable energy was an emerging asset class it was probably right that the asset
class couldn't survive without subsidies and we're seeing that with batteries at the moment
right it's still probably at the margin if they are economic without subsidies but we've
seen this extraordinary fall in technology costs for both wind and solar components and
technology and that's basically made subsidies non-existent or not required because of that
falling in technology costs.
All the costs so the access to renewable, cheap, reliable energy is very very important
for our society right and I agree with a lot of people when they say that we need to get
clean but unfortunately you know life doesn't always work out the way that we want so there's
also many people discussing that it might be a gradual step over the next 50 years so
to speak and they're saying that you know if you look at natural gas that might be the
least of all labels in the transition phase I think I saw in the portfolio that you have
infrastructure exposure to the gas space is that still the case?
Yeah it is and look we very much remain supportive of gas as a transition fuel we think it's
absolutely fundamental to ensuring that we have an orderly transition to renewables and
so.
What's the asset?
We have two gas pipelines in the portfolio and these gas pipelines they're similar in
strategy in that one goes north and one goes south right so the one that goes south is
our Tasmanian gas pipeline and that takes gas basically from the Bass Strait and from
the Victorian sort of mainland down to down to Tassie and then the one that goes north
takes gas from the Morumbar gas base and up to Townsville but very similar strategy in
terms of the role that those pipelines play in that the one in the north connects into
the Townsville power station the one in the south connects into the Tamar Valley power
station in Tassie right and so they very much provide the role as providing security energy
security to those regions when renewables or other forms of generation may not be available
to provide power right so it's very much an energy security play and that just that just
sort of further compounds the point that we do believe that gas has a role to play in
an orderly transition to to renewables because at the moment battery storage is not going
to be able to play the role of that firming power because you need firming power right
the wind doesn't blow all the time obviously the sun doesn't shine at night time and so
you need that complementary power and so batteries are just not at the point and probably
will not be at the point where they can play that role to any large degree for several
years and so we definitely think that gas has a continuing role to play in the EMG mix
the other thing to mention as well is that you know gas is still required by industry
for the sort of heating and other manufacturing purposes and at the moment electricity just
cannot play that role so you know I think it's important to sort of remember that the
gas has a dual role in the economy it's going to be a transition fuel but equally as well
it is a fundamental part of manufacturing in Australia as well.
That's what you're saying your team essentially looks for infrastructure that's difficult
to be removed and you know it's going to be required for many generations to come right?
That's right yeah.
So speaking of the team how big is the team now?
So the team is so we split our team into investment personnel and asset management personnel so
in the investment team around 30 and in the asset management team that's close to 50 now
so we've got a team in Australia around about 15, 20 and then we've actually got a team
as well based in the UK who do a lot of our we've got an anaerobic digestion platform
that we're building out in the UK and they work on that platform so it is a scalable
team now and importantly you know we think it's a good mix to have both investment personnel
but particularly the operational guys right so you know they are very much involved in
the day-to-day running of these assets they don't turn the spanners but they manage the
guys that turn the spanners right so you know we think it's really important that we sort
of augment that sort of investment capability that we have with actual guys that sort of
live and breathe these assets on the ground.
Well having a good team is very very important and I suppose our clients one of the main
questions they want to understand is essentially the behavioural psychology behind the alignment
of the team and how they're remunerated as we know different remuneration structures
is essentially you know create different outcomes.
So how is the fee structure and bonus structure work at Palisade?
Secondly is there a high watermark?
What's the benchmark?
Why is the benchmark chosen?
And can you give a bit of an overview that would be great.
Yeah sure so the alignment and the remuneration I think the key point is that 65% of Palisade
is owned by staff right which is pretty powerful and that's consistent with the broader pinnacle
model which is they take minority stakes in various affiliates and then provide back office
support distribution you know HR etc. so it's consistent with the broader pinnacle model
but what that model allows us to do is as an investment team we can focus on what we
do best which is investing and managing assets and so fundamentally we are aligned through
our ownership of Palisade and so very simply we have a short term incentive and a long
term incentive at Palisade our short term incentive is funded out of the performance
fees that we generate for the business and obviously those performance fees are linked
to the performance of our clients portfolios and then we have a long term investment scheme
which is the ability to participate in the equity of Palisade so there's that long term
alignment and there's also best in provisions as well so you know heaven forbid if we decide
to leave you're always leaving you're always leaving something on the table which is good
it's a good tool to ensure that people sort of remain with the business as a retention
tool but and then also we've had several team members invest their own personal capital
as well into into Palisade as well and you know I think having that LTI is is really
powerful but when you actually put your own personal capital into the business it really
sort of sharpens the mind in terms of wanting to ensure that you you are really delivering
the best outcomes for your clients because it's your own personal money at risk as well
so you know I think the the incentive regime that we've got at Palisade is it strikes
right balance of fairness of alignment and and retention as well in terms of how performance
fees are structured across the business you're absolutely right it's a high watermark and
if there is underperformance against that high watermark then we need to catch up to that
to that high watermark again before we can start generating performance fees fortunately
when we're not in that position where where we're underwater so what is the benchmark
so the benchmark is a is a bonds plus a margin benchmark so on the on the diversified funds
it's bonds plus five percent and why was that chosen why was that chosen look I think there's
probably there's probably three main benchmarks you can choose within within infrastructure
one is a a CPI plus benchmark and sort of that makes sense given the the natural sort
of linkages to inflation one is a fixed benchmark so you know seven percent eight percent is
not is not unusual in the current market and then the others which we've seen is obviously
a bonds plus benchmark now in terms of why that was chosen look I think you know infrastructure
being you know we spoke before about being that defensive asset class you know I don't
agree with this but people have often referred to infrastructure as a proxy for bonds given
the defensive nature of the asset class I I can see why people say that but personally
I don't I don't agree with that but isn't that the argument essentially with COVID that
you know commercial properties never come off and ever and then all of a sudden you
have a supply side shut down and nothing happens for two years and that's right so COVID did
a lot of things to us classes which people never expected but when I get concerned people
say oh this has never happened this will never happen going forward yeah yeah but but anyway
so so I think you know in that regard there's a there is a sensibility to having a sort
of bonds plus a margin benchmark for infrastructure and that's ultimately what was chosen for
our fund you know 15 or so years ago that's been the benchmark since and you know we think
it we think it provides a sort of good level of sort of alignment and and and performance
benchmark for the time that's really good to get an understanding of so is there any
thoughts you want to leave our listeners and clients with look I think the beauty about
one of the things I like about infrastructure is you can it's real right I know it's real
asset right but you can see and touch it you can experience it I experienced it last week
in in Noosa when I flew into Sunshine Coast Airport I hate to admit it's actually my first
time on the new runway even though it's been built for two years yeah so slap on the wrist
for me but but like it was it was fantastic it was a it's a really great airport now and
you know I think it's we're turning our minds now to a terminal redevelopment for that for
that airport and so I think it's going to be really really exciting but that's just
one example in the portfolio where you know you can actually visit you can experience
our our assets you know I was in Gold Coast last year with with the family and we we had
a ride on the we had a ride on the tram and and that's something that we've that's something
that we funded right so it is it is nice from that perspective to be able to see and touch
and experience assets that you're that you're invested in and I think the beauty with our
portfolio is that you know we don't just have capital city infrastructure given our mid-market
focus we are very heavily invested in regional Australia as well so you know we've obviously
got our our renewable portfolio which which you know given the nature of those assets
are in regional communities but we've also got Port of Portland in in sort of regional
Victoria we've got our livestock exchange agri infrastructure business in in regional
Australia so it's quite nice that we're able to sort of touch sort of various various sort
of communities with Australia and that that's really important to us as a as an infrastructure
owner is you know working closely with the with the communities because a lot of the
a lot of the communities that our assets exist in you know they rely very heavily and on
that on that on those assets to to be able to to to live right so it is it's a it's
a nice you know from that perspective it's a it's a it's a nice it's a nice sort of
investment to be to be making but you know I think if I could sum up the strategy in
one word it's it's access to a high quality portfolio of mid-market infrastructure assets
that have both defensive characteristics but also good levels of capital growth and and
good income yields as well.
If anyone wants to learn more about the strategy and the team how can they reach?
Pinnacle do a great job with us as our distribution partner so you can either reach out to someone
on the Pinnacle team their details are on the website or please look me up on the Palisade
website and I'll be happy to assist as well.
Fantastic Andrew thank you very much for your time it's been really really interesting.
Thanks Murdoch, my pleasure.
Have a good day.
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