By Chris Wright
Macquarie Korea Infrastructure Fund was listed in Seoul and London in March, raising W942 billion ($1 billion). It was the first infrastructure fund to be listed in Korea but followed a model that Macquarie Bank has refined numerous times in Australia and elsewhere in the world: pour a group of assets generating predictable revenue streams into a fund, list it, and ensure a steady flow of fees, often performance-based, back to Macquarie Bank itself. Macquarie has now done this 24 times.
MKIF has investments, or commitments to invest, in 14 assets, 13 of them toll roads, each of them with some form of inflation-adjusted long-term government revenue support tied in. It is run by a joint venture between Macquarie and Korea’s Shinhan Financial Group.
In common
In its own right, MKIF was a significant deal: the second-largest Korean IPO in a year, only the fourth dual-listing IPO from the country and one of the biggest IPOs in Asia this year. But it’s the sense that this is the first of many that makes the transaction eye-catching. Korea has a lot in common with Australia when it comes to the demands of institutional capital: each country has compulsory contributions to pension systems, which creates a great deal of cash seeking assets that generate stable long-term yields, and infrastructure is ideally positioned to provide that.
Infrastructure funds themselves are nothing new in Korea. Korea Infrastructure Fund II was launched a year ago under the management of Korea Development Bank alongside the National Agricultural Cooperative Federation and Samsung Life Insurance, raising W1.5 trillion; Kookmin Bank launched a fund called the Balhae Fund in November with W1 trillion of commitments; and Hana Bank and Darby, the Washington DC-based subsidiary of Franklin Templeton, have announced a W500 billion fund.
But the listing of one of these structures is newer, and has only been permitted since the Korean National Assembly passed new legislation in early 2005.
Legislation like this is not just the preserve of Korea. In Singapore, the Business Trust Regulations were passed in January 2005 with enabling guidelines appearing in October, allowing for a new form of listed structure. It’s a little like a Reit, with high payout ratios, but with a single trustee-manager rather than the separate asset manager common in real estate structures. Pacific Shipping Trust, the first such trust to be sold in Singapore, listed on May 26 and was underwritten by DBS, giving investors exposure to eight container vessels chartered by PIL Group, a privately owned Singaporean shipping group.
Attraction
Again, the attraction for investors was a stable long-term yield, in this case 9% in the first year. And like MKIF, which combines a base fee with a 20% performance fee on any gains beyond 8% per year, Pacific Shipping Trust builds a performance-based element into its management fees.
So where to from here? “The two clear markets where infrastructure funds will develop over the next five years will be India and possibly China,” says Nick van Gelder, managing director of Macquarie Shinhan Infrastructure Asset Management.
Eng Seat Moey, managing director of debt capital markets at DBS, says structures like this “suit any type of large, chunky assets with well-defined income streams.” Aircraft leasing is one example he expects to see; in Canada, the US and Australia it’s common to find power generation and distribution utilities turning up in listed fund form. “Infrastructure, water and ports are all possibilities.”
Structures like these have tended to sell to retail on the back of the brand behind them, since the mechanics of the securities themselves can be complex. It’s a tough call, for example, for small investors to see their way through Pacific Shipping Trust, which will use $127 million in debt to purchase eight container vessels from the sponsor, which will then be chartered back to PIL on eight-year to 10-year contracts, paying down the debt as it goes and generating an income stream through the charters. For one thing, there’s a foreign exchange risk, which forced DBS to lower the IPO range following roadshow feedback. Secondly, there’s the cyclical nature of shipping, the uncertain lifespan of the vessels and the question of what happens at the conclusion of the charters.
Heady combination
If more infrastructure funds do appear, it will be interesting to see if they retain the clarity of focus of the Korean and Singaporean listings. Macquarie does not always have a reputation for such definition: its Macquarie International Infrastructure Fund, listed in Singapore and touted as an Asian infrastructure play, in fact has only one direct holding in an Asian asset, the Changsu Xinhua container port west of Shanghai, alongside an eclectic mix including a Canadian aged care provider and Brussels airport. But the ageing Asian demographic, the inability of many Asian governments to improve infrastructure through the public sector and the growing weight of mandated pension money in the region are a heady combination suggesting that these structures will find a willing audience.
