Why short-term investors are missing out on this exciting long-term theme

In this episode of The Pitch, TMS Capital's Ben Clark discusses what private market investors do differently, and what to learn from them.
Ally Selby

Livewire Markets

Note: This interview was recorded on Wednesday, 6 December 2023. You can watch the video or read a transcript below.

In a market where quick gains often overshadow steady growth, it's crucial to identify areas ripe for long-term investment. 

That's why TMS Capital's Ben Clark believes the underappreciated realm of infrastructure investments is so attractive today. He argues that despite the recent dip in sentiment due to rising interest rates, infrastructure remains a sector with immense potential. 

He argues these assets are incredibly resilient, with predictable cash flows to boot. Particularly now, as interest rates near their peak, Clark believes infrastructure investments have a place in investors' portfolios. 

In this episode of The Pitch, Clark discusses the significant gap between how private market managers and public markets value these assets, suggesting a misalignment in perception that savvy investors can capitalise on. 

He also touches on potential M&A opportunities within infrastructure, citing recent high-profile acquisitions and pinpointing potential target companies over the year ahead. 


Ally Selby: Hello and welcome to The Pitch, brought to you by Livewire Markets. I'm Ally Selby, and today we're very lucky to be joined by Ben Clark from TMS Capital for an opportunity he believes the market is getting wrong right now. Thank you so much for joining us, Ben. Excited for this discussion today.

Ben Clark: Thanks, Ally. Thanks for having me.

Underappreciated areas of the market

Ally Selby: What area of the market do you think deserves some more love?

Ben Clark: Well, maybe not love, maybe some dating, to start. I think the answer is infrastructure. It's been really out of favour this year and I think we all know why. When rates go up as hard as they have, asset prices are depressed; and infrastructure ultimately are real assets. We've seen some real pressure on property trusts and infrastructure, but I think as we are getting very close or we are at the peak of interest rates, this is an area investors should start to look at again. These were fantastic performing areas for many years before 2023, and I'm pretty confident they will start to resume that performance. Right now, we're seeing a lot of these stocks at 12-month lows.

Ally Selby: What's the consensus view here on infrastructure?

Ben Clark: Consensus is they do it tough. Infrastructure companies typically have fairly high levels of debt, but they have very predictable cash flows that can service that debt. So I think there are two parts to it: The first is rising interest rates, which raise debt costs, so the interest expense starts to eat into cash flows, resulting in lower profit. Secondly, as we said at the start, assets in a 4.35% interest rate environment are worth less than they were 12 months ago. So I think that's kind of the consensus view on the area at the moment.

Ally Selby: Why the opportunity today then, if interest rates are lowering the value of those assets?

Ben Clark: Well, I think the opportunity is when I listen to managers in private markets, so they're owning assets in private hands, not on public markets. They don't necessarily view the current cash rate as the interest rate at which you should value an asset. If they're going to own something for 30, 40, 50 years, they will think, "What's our interest rate expectation over that period?" And that probably hasn't changed that much from what it was 18 months ago when the RBA kicked off. It might be 3-3.5% or something like that. You would also look at the way that those funds or assets - there's some criticism around it - but they haven't nearly marked down the value of those assets the way that the share market has. So, to me, there's a gulf that's opened up there between what the patient long-term investors value these assets at versus short-term markets. So I think that's one reason.

The second is you've got to remember, it's not like, say Transurban's, interest cost has gone up in the last year significantly. They will have rolling pools of debt that might be for 10 or 15 years. And while their interest costs move higher as they come to refinance those pools of debt, it hasn't happened straight away. And if we do start to see in 2024, or 2025 a bit of a normalisation back down in rates, you might find that what they're rolling those pools of debt back onto isn't nearly as bad as it is today.

The next great M&A opportunity in infrastructure

Ally Selby: We saw Sydney airport being taken out by M&A during COVID-19 when it was at an all-time high and it was also shut at that point in time.

Ben Clark: Incredible, yeah.

Ally Selby: What do you think could be the next great M&A opportunity within infrastructure?

Ben Clark: That actually goes back to what I was talking about before. The airport was shut and it was showing no signs of reopening for at least a couple of years. But private capital didn't look at that short-term problem and think, "Oh, we've got to pay less for it". They paid an all-time high for that stock. And that goes back to taking a different viewpoint to what the public markets can take. 

We have faced a shrinking number of A-grade asset owners on the Australian Stock Exchange. I would say there are probably five or fewer in that basket now, and it's been because of M&A. Transurban (ASX: TCL), I think, would be a top candidate. There's a big industry super fund that's the largest shareholder of those assets that has shown a willingness to take assets private. APA (ASX: APA) is another one. And a third one is Auckland Airport (ASX: AIAwhere there's been a sell-down by some of the natural owners.

The other thing you've got to remember, Ally, is although interest expenses will go up conceivably over the next two or three years, the revenues these assets are generating have also gone up. Transurban's tolls are tied to inflation. For APA, 85% of its revenue is linked to inflation and will not come back down. So, revenue for a lot of these asset players, has been reset higher and will now probably work its way up at a more normal pace from that higher level. So it's not like it's just a cost thing that's eaten into them. Revenue has also benefited over this period as well.

Ally Selby: Thank you so much for coming on The Pitch today. It was awesome to have you on the show. If you enjoyed that too, don't forget to subscribe to Livewire's YouTube channel. We're adding so much great content just like this every single week.

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Ally Selby
Deputy Managing Editor
Livewire Markets

Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...

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