Jonathan Van Rooyen: We price on fundamentals, not emotion

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Think about some of Australia’s most prominent buildings, bridges, tunnels and railways. Now tell me how many of them have an ASX ticker. Not many, as Invest Unlisted’s Jonathan van Rooyen  explained during a recent chat.

You won’t find indispensable assets like Perth Airport or NSW’s M4 and M5 toll roads lit up on the boards at 20 Bridge Street, Sydney.

Even some of those in the sector that are listed, such as Sydney Airport (ASX: SYD), are now looming large in the targets of private equity funds if recent events are any guide. This would see such assets ultimately being delisted, a trend that’s been playing out for years in global markets.

“Around 80% of our assets aren’t found on the stock exchange. There’s a very finite listed investment universe in this space,” Van Rooyen said.

Of course, there are tradeoffs when you’re considering putting your money into one of the many listed infrastructure funds out there versus a more “alternative alternative” like Invest Unlisted.

“We have a longer-term liquidity window, priced monthly, while listed infrastructure is priced daily...Valuation is another fundamental difference, but we price on fundamentals and not on emotion. We have a long look-through with a 25-year DCF model, observable cash flows and a transparent process that’s provided monthly."

The upside of this, he said, is that it dampens volatility - a characteristic that’s particularly valuable to investors in periods such as recent market experiences since March 202.

In the following interview, Van Rooyen digs deeper into this “defensive with a difference” asset class.

Edited transcript

What are some of the main differences between listed and unlisted infrastructure?

We're completely unlisted - we've got a 41 asset diversified unlisted only portfolio, and we think there's a place for listed and unlisted in everyone's wholesale investor portfolio. We just don't believe they belong together in the same set of assets. That's what we think our competitive advantage or our distinctiveness is. That's actually the same way as the Future Fund treats their infrastructure allocations. Why is that? Because we think it's all about correlation and trying to remove or manage your volatility within the context of your investment decision.

Exploring some of the other more fundamental differences between listed and unlisted, most of Australia's essential infrastructure assets are actually unlisted. There's a handful of listed stocks on the stock exchange. Sydney Airport is just another example of possible privatisation of what's currently a listed infrastructure stock. So most of the assets, 80% of our portfolio for example, is actually across Australian assets which you can't find on the stock exchange. So there's a limited investible universe. I think that one of the fundamentals is liquidity, the trade-off in terms of liquidity between unlisted and listed is obvious, we have a longer-term liquidity window, whereas listed is daily.

Then I think the other fundamental differences are around valuation, which we think are fairly important. We are priced monthly. The stock market obviously is a daily pricing event, but we price on fundamentals. We don't price on emotion, which can happen from time to time. So we have a long look through, in terms of a 25-year DCF model. We have observable cash flows which are clear, there's a transparent process, and it's provided monthly. I think that limits or dampens the volatility component compared to listed infrastructure. We've seen that over the COVID period as well.

What's so appealing about unlisted Australian airports?

Airports in our portfolio are very important, and we've been invested in them for some time. What we think about in terms of those assets and that asset class, we've got like 75 years remaining on those concessions. COVID absolutely has had an impact in the context of a 75-year remaining concession.

It's a very small element impacting that business model. But essentially an airport is three assets in one. There's a shadow regulation with the aeronautical revenue that you have in relation to your airline counterpart. There's also commercial retail. It's like a captive shopping centre, and a very good one, as the second component. Then the third component is property development. You've got an extraordinary land bank with significant long term leases attached to it even during and post COVID. The transition to online shopping, and the movement of goods through air freight, as we've seen, has been quite a strong performer as that third component of the asset.

Wrapping that all up is a natural position in the economy, where invariably there's only one main airport servicing a capital city. 

It's got a very strong position in terms of its business model, and hence, there are no alternative uses. You think about Perth for example, it's the most isolated capital city globally. The only way to and from Perth, unless you've got a lot of time on your hands, is through Perth Airport. Perth Airport is one of our largest assets, and we invest on behalf of Australian wholesale SMSF investors alongside the Future Fund in that asset. So we think airports, notwithstanding the impacts of state lockdowns and international borders closures, are a fundamental asset in the portfolio, and a critical part of the Australian economy.

So the rebound and the growth from both domestic and international passengers will see that come through overtime, and we're pretty excited about the drive that's going to deliver through the portfolio. 

What's your take on the wave of M&A activity we've seen in real assets?

We think it's fantastic, it just underpins the value of the 41 assets we have in terms of the offering to the Australian SMSF and wholesale investor. The really long term, smart money around the industry funds with long term visions and investment horizons have recognised that Sydney Airport is a terrific asset with good value. For them to make that decision, I think that speaks to a number of things. 

It highlights the recognition about the quality of these assets in every portfolio, and it's almost a catalyst for the rerate of the airport sector, certainly from our perspective.

I think we're seeing it everywhere, not just with the Australian pension funds and industry funds but also with Canadian pension funds all looking at significant stakes in Australian assets and indeed globally. They're doing the same things that every wholesale investor should be thinking about in the context of getting assets or getting hold of assets with low correlation to listed markets and volatility. That can be the foundation of the portfolio that we talk about. So I think that trend will continue. There's a very large and growing cash pile of dry powder in terms of investible cash that a lot of those big funds have. I think we'll continue to see those real trophy listed assets, at least structures or transactions happen at an increasing pace.

What does that do? It makes the listed infrastructure universe narrower, and, as they disappear off the ASX, it makes the listed infrastructure sector more global. So from our perspective, we think that's terrific because it gives the investor an opportunity to get listed global exposure, but unlisted domestic exposure through our vehicles. 

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