Backing utilities is 'good for governments, communities and our clients', says Macquarie’s Ben Way
Ben Way knows how to keep his head when many around him are losing theirs.
In July 2021, he was given the top job at Macquarie Asset Management (MAM), the A$892bn (€546bn) global fund manager of Australia’s Macquarie Group. And recently, the firm has come in for criticism over its high-profile investments in two troubled UK water utilities.
The first was Thames Water, which MAM sold in 2017. Today, the UK utility is grappling with several billions of pounds worth of debt amid high interest rates and has been at the centre of controversy over the returns made by private investors from a public utility during a cost-of-living crisis.
Then in 2021, MAM bought a majority stake in another struggling UK water company, Southern Water, for more than £1bn (€1.16bn). The acquisition came a month after Southern Water was hit with a £90m fine for illegal discharges of sewage between 2010 and 2015.
MAM’s investment will help Southern Water upgrade its network with £2bn to be invested over the current regulatory period to fix the pipes, pumping stations, and sewers which are “underperforming and causing harm to the local environment”.
Way is well aware of the serious issues that MAM must confront to transform Southern Water into an institutional-grade asset. He says the firm consulted with water and wastewater services regulator Ofwat about its plans for Southern Water, which include a zero-tolerance approach to environmental pollution, to improve Southern Water’s environmental track record, which MAM recognises is “one of the worst-performing in the UK water sector”.
Given the importance of reputation in the fiercely competitive world of asset management, wading back into UK water utilities may seem like a high-risk strategy. The woes of Thames Water and Southern Water have flooded the pages of the UK national press, and could act as a deterrent to institutional investors looking to invest in the sector.
But Way trusts his convictions and his team at Macquarie despite doubters in the media and elsewhere. “I totally respect a robust, vociferous media,” he says. “And I certainly acknowledge that within that media there will always be people that have viewpoints different from my own. And I think that’s a good thing.
“But a lot of what’s been written about Thames Water and Southern Water is frankly, from our point of view, factually incorrect. We must accept that, but it does create questions for clients because they read the newspaper. So it’s our job to present them with the facts, remind them why we’re a good owner and why this is a good sector.”
Way is adamant that utilities remain a highly attractive asset class for institutional investors, despite the manager having to inject £550m of equity into Southern Water last August to help the utility maintain its turnaround plan. This latest capital injection will enable Southern Water to increase investment in its network to £3bn by the end of 2025.
Way is determined to show the investment world that utilities remain attractive assets, despite the costly and sometimes painful nature of the work needed to produce acceptable returns. “There can be a very healthy arrangement where governments and regulators can rely on people like us to bring private capital in to own [utilities],” he says. “But of course, it has to be done within a licensing framework.
“One of the things that I think is often misunderstood is that we don’t set the prices of any utility we operate. The prices and the service levels that we have to adhere to are set by governments and their regulatory authorities. And that’s how it should be because those authorities need to take into account things like the cost of living and what communities can bear.
“So I think investing in utilities is good for governments, good for communities and good for our clients. If we didn’t think those three things were true, we wouldn’t do it. And I think going forward it will continue to be a good sector for investing where there is a very effcient regulator who has created a good environment for investing.”
There are other factors beyond the control of investors and managers, of course – not least, rising interest rates. “There was already momentum, both before and after the change in interest rates of capital moving into the private space, generally because there was an under-allocation to private markets, which I think holds true irrespective of a change in interest rates or interest rates being higher for longer.”
Way adds: “A lot of institutional investors have had a desire to have an increased exposure to the private markets. And I think what they would say is that they’re still under-allocated to the [sector].”
Last year there was a slowdown in private markets fundraising, in large part due to uncertainty over valuations and allocation reviews among investors.
“We’ve seen very good fundraising results over the last few years,” says Way. “From a Macquarie point of view, every year for the last three or four years we’ve had a record fundraising year, where we’ve often been almost 50% higher than the prior fundraising year in our private or real assets side. So I think there was just a general reallocation going on.”
Way believes fundraising for private markets may be “a little bit more muted” entering 2024, “particularly because people are dealing with things like the denominator effect in their allocation books, where public market values have come right down”.
He adds: “Also, I think some clients may just generally be holding more in cash because they are nervous and cautious about what’s happening in the world. And I think it’s right for clients to be a bit more cautious.”
Way believes the recent increase in attention among investors on private debt will continue. “When relative value changes, clients will perhaps pull back on certain allocations to one sector and increase their allocations to others. And that, I think, is why private credit is seeing very good activity, because people see that it makes more sense now in a higher-interest-rate world.”
In addition to private debt, Way says investors remain attracted to certain other private asset classes. “We see ongoing, continued strong support for things like infrastructure and energy transition because people see that there’s still a big opportunity set there. Also, people see the sorts of returns that you’re still able to get, even allowing for higher interest rates, and for a lot of infrastructure, inflation hedges are built in.”
Way is less enthusiastic about traditional real estate sectors. “Core office and core retail is no doubt challenging today – particularly offices, where we’re seeing the impacts of a cycle change, higher interest rates and some structural challenges in certain markets,” he says. “You know, the way people work, the type of offices they want, those sorts of things are changing and evolving. As a consequence, there is a lot less interest in core offices today, particularly in developed large markets.”
On the other hand, Way believes the residential sector offers several pockets of opportunity, especially in the UK. “The UK has a massive shortage of rental housing today in places like London, but also in satellite cities like Bristol or Birmingham or Manchester and so on,” he says. “This is creating opportunities and that’s something that we’re pursuing at the moment.”
MAM focuses on housing via Goodstone Living, its UK-based specialist build-to-rent investment manager and developer, established in 2020. The company has almost 900 homes under construction – 338 in Edinburgh and 550 in Birmingham – as well as a significant pipeline of development and turnkey opportunities in London and key regional cities.
Way is mindful that rents must be ‘affordable’ to create institutional-quality, reliable income streams. “The rental market is incredibly competitive because there’s no new stock coming onto the market. So I think for places like New York or Sydney or London, that’s where we need people to build affordable housing for particular generations such as Gen Z.”
Way believes affordable rents can be achieved by basing them according to a local demographic’s salary brackets. Ultimately, though, he takes the view that the only way to address the housing crisis and curb soaring prices is to massively increase supply.
“If we can ratchet up supply, that should help with pricing, particularly in a higher-inflation economy. There’s no doubt that a lot of people around the world are spending a bigger percentage of their take-home pay on housing at the moment. And that’s generally because in a lot of places where people have moved to, there’s a lack of supply. We look at where those market opportunities are happening and try to address [the housing issue] by creating more inventory.”
Way is keen to stress the nimbleness of Maquarie’s investment approach. “If you’ve got a platform, you should be able to offer a breadth and depth of opportunities for clients, irrespective of where relative value is shifting or how their needs are changing. We don’t want to be all things to all people, but we do want to be able to provide different opportunities irrespective of where we are in a cycle.”
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