The Australian Federal and state governments are attracting the attention of the global investment community with their plans to sell a significant number of quality assets in the next two to three years, as a means to fund important economic and social infrastructure projects.
A catalyst for the sales is the Federal Government’s $5bn Asset Recycling Initiative, which provides an incentive payment to states for asset sale proceeds which are reinvested into productive infrastructure.
In the context of these asset sales, it is important to acknowledge that Australia is not a single transaction market as the fiscal and political agenda of individual states determines the timing and form of asset sales.
Types of assets to be offered
While the January 2015 state election result in Queensland has taken a number of infrastructure assets off the ‘for sale’ list, the pipeline of available assets across remaining state markets remains strong.
The New South Wales (NSW) electricity transmission and distribution asset is an especially significant transaction which is intended to fund a $20b investment program. Victoria is divesting Port of Melbourne which is Australia’s largest container port and the last major container port, with the exception of Fremantle, yet to be privatized.
The Western Australian Government has reportedly undertaken a review of asset sale options and is understood to be actively considering the sale of two bulk commodity export facilities, Kwinana and Utah Point. Federal Government assets subject to sale speculation include Defense Housing Australia and the Australian Securities and Investments Commission registries business.
Across Australia there are also a significant number of greenfield assets in the pipeline, including roads and tunnels, and social infrastructure projects such as hospitals and prisons. In particular, the Queensland Government is expected to aggressively target the involvement of the private sector in PPP transactions in the absence of an asset sales program.
Who is likely to be interested in buying, and how keen is the competition?
The asset sale pipeline across Australia is attracting the attention of both strategic and financial investors from Australia, Asia, Europe, the Middle East and North America.
As a highly regulated, mature OECD market, Australia has proven attractive in recent years to infrastructure investors, with several funds establishing offices in Sydney and Melbourne.
Prices paid in recent transactions have exceeded vendor expectations with multiples in excess of 20 times earnings for several port assets, which has been attributed to global investors chasing yield and the burgeoning amount of funds in pension funds allocated to the infrastructure sector.
Several international investors have made comment on the level of sovereign risk in the context of the withdrawal of Queensland assets and the cancellation of the East-West link tunnel project in Victoria. While disappointing for the investment community, it is important to recognize that opposition political parties had clearly articulated policy positions on these transactions, underlining the importance of understanding the dynamics in each state market.
Partnering with local investors
Foreign investment capital is welcomed by Australian governments and the states spend considerable time offshore conducting roadshows with their advisors to brief potential investors.
However it is common for a foreign investor to partner with a local super fund or investor on bigger asset sales. Foreign funds can find it beneficial to have co-investors on the ground who are familiar with the local transaction environment and are here permanently throughout the course of what are sometimes quite lengthy deal processes.
We see a range of consortium structures, from sovereign wealth funds taking a minority stake to preserve specific tax advantages, through to the majority of funds being provided by a foreign infrastructure fund partnering with local strategic investors, who bring operating expertise and synergy benefits to the consortium.
Long privatization history
There is a long history of privatization in Australia and the current pipeline is arguably the most significant we have seen in this market.
In a low-interest global investment environment, the available assets are an attractive opportunity for both strategic and financial investors who are able to commit the time to understand the Australia transaction landscape and the characteristics of the various assets on offer.
David Clanchy is New South Wales Managing Partner, Australia, Transaction Advisory Services, EY.
For further information contact David on (P) +61 9276 9272. [email protected] or connect via http://au.linkedin.com/pub/david-clanchy/8/23/2b4/en.