Infratil goes empire-building BIL-style

Friday 18th January 2002

In a decade in which investors have had little to celebrate Infratil has been one of the outstanding success stories. From the 1994 launch until March last year the original shareholders reaped an annual average return of 17.7%, assuming they didn't participate in any of Infratil's rights issues.

Net tangible asset backing a share grew even faster, at 18.9%.

This year looks set to be another good one. In the September first half the company saw good growth in its port and airport investments and managed its way shrewdly through changes in the electricity sector.

Given the lack of any signs of restlessness from the market it might seem churlish of Shoeshine to disclose a recent sense of disquiet about Infratil's direction. Even so, investors should be paying close attention.

Shoeshine's unease stems from the fact Infratil's success has been built on its single focus, a first for New Zealand back in 1994, on investment in infrastructure and utilities.

This is an area where the company's manager Morrison & Co trumpets, with some justification, an arsenal of expertise. So fond is Infratil chairman Kevin O'Connor of the word that he used it five times in his introduction to last year's annual report.

That expertise, however, has a demonstrably limited applicability. Infratil's sister funds, Infratil Australia and Utilico, were set up in the afterglow of the New Zealand company's early track record but neither shared its success.

The Australian offshoot suffered from a deep discount to asset backing as it became clear it didn't have the scale necessary to build up a meaningful spread of sufficiently large investments to tackle the bigger market. After a somewhat unseemly control tussle it was absorbed into an existing Australian infrastructure investor.

Utilico, the international arm, struggled with both problems on an even larger scale, being smaller still and having the whole world to invest in. It is now in the process of being wound up although its new manager Ingot Capital Management, an outfit associated with Infratil director and Morrison & Co stalwart Duncan Saville, may have other plans.

You would have thought these two blots on Morrison & Co's copybook would have taught the manager the value of sticking to your knitting but it seems not.

The investment last year in Glasgow's Prestwick Airport, Infratil's first outside New Zealand, raised some eyebrows but the financial community seems to have accepted that it's a sound asset bought at a favourable price.

Encouraged by this reaction Infratil and its manager have started searching for more offshore investments. As it had only $4 million of cash in September and a by no means lightly geared balance sheet anything they find will have to be funded by selling New Zealand assets or by holding another rights issue.

Since overseas investment wasn't allowed when Infratil was set up the directors propose to put a change to Morrison & Co's management contract to a shareholder vote. The Utilico debacle notwithstanding there are good arguments for approving it.

With $600 million of assets Infratil is hardly a sharemarket giant but that's still a lot of money to find a home for within the New Zealand infrastructure and utilities sectors. And upheavals like those in the electricity sector, which Infratil exploited cannily, don't happen every day.

So looking offshore, while adding a big dollop of risk to shareholders' investment, looks like a sensible step. Not so the recent interest in technology.

This arose in a reasonable-sounding manner.

Morrison & Co initially started looking at technology areas that related directly to infrastructure, so its worthies could at least claim they could contribute experience on how new technologies might be applied in practical fields.

But the manager has found this approach too restrictive and is now, in effect, applying for carte blanche approval to invest in "technology" initially, apparently, within New Zealand.

And that's a vast departure from what Infratil was set up for.

The half year report tries to justify the move by claiming it "takes advantage of both the company's and the manager's strong position in New Zealand at a time when there are many exciting investment prospects and a limited number of parties with the capital and skills to invest in and support these businesses."

Shoeshine reckons there are plenty of people with money to invest in local technology ventures, provided they have worthwhile products and a viable business plan.

There are also plenty of people prepared to invest in ventures that have neither, such as Eforce and e-Ventures. In this business a fool and his money are soon parted.

It's hard to imagine how a bunch of people with "expertise" in ports, airports, and electricity companies have come up with the notion they can spot winners specialist venture capital and private equity investors have overlooked.

And why are Infratil's directors and management applying for this quantum change at the same time as they seek approval to go offshore? Can it really be that the whole world of infrastructure and utilities doesn't provide opportunity enough?

The half-year report refers to the time Morrison & Co has already sunk into investigating technology investments and Shoeshine suspects the proposed management contract changes will include a hefty fee increase in one form or another.

In other words, shareholders will be asked to pay not only for the expertise the manager has but also for expertise it hopes to accumulate in a totally different field.

The exercise smacks of empire-building along the same lines as Brierley Investments whose executives famously overestimated their own abilities.

It would be interesting to know what institutional shareholders such as Tower make of it. They are, after all, already paid by their unitholders to do stock-picking and sectoral and geographic allocation.

Most have vastly greater resources than Morrison & Co. Why should their investors pay a second tier of management fees?

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