State Super (DC) to steer clear from infra after Queensland airports sale
The recent sale of Queensland Airports Limited (QAL) stakes by State Super, Australian Retirement Trust (ART), and The Infrastructure Fund (TIF), managed by Macquarie Asset Management, marks a significant transaction in the Australian infrastructure market.
The transaction exemplifies how State Super, a closed pension fund, strategically manages long-term assets while facing the unique challenge of a shrinking membership base.
State Super
"The defined contribution fund is unlikely to buy another infrastructure asset unless we have an exit as well," John Livanas, CEO of State Super, told AsianInvestor.
Unlike typical open superannuation funds, State Super, officially known as the State Superannuation Scheme (SAS), has been closed to new members since 1992. This closed status significantly impacts its operations and investment strategies.
Livanas explained the fund's unique structure.
"Effectively, if you look at our overall fund, we've got around A$40 billion ($27 billion) in assets. About A$8 billion of those assets are part of a hybrid scheme, and it has a particularly rapid runoff rate."
The hybrid scheme includes both defined benefit and defined contribution components. When members retire, they receive a lump sum payment, contributing to the rapid decline in this part of the fund.
"It shrinks by about half in value every seven years. So running a fund with quite rapid runoff requires a very different process. The remaining A$32 billion, while also declining, does so at a slower rate as it primarily consists of longer-term pension payments," said Livanas.
SELLING QAL
Livanas said that the decision to sell the airport assets was driven by multiple factors, primarily the fund's declining nature as well as liquidity requirements.
"Because we're a declining fund over a period of 10-15 years, we have a liquidity process in place. We always consider what assets are appropriate to sell at a given time," he said. This process is crucial for meeting obligations to retiring members without the cushion of new contributions.
"We were in a position where both ourselves and ART felt this was a really good time," he added.
“The confluence of those decisions, plus TIF's decision, led us to feel it was an appropriate time to offer to the market a very substantial share in what were really good assets.”
State Super has been participating in the growth of the QAL assets and supported their upgrade during Covid, as well as the investment in the new international terminal.
“We saw passenger numbers rise. With that activity having taken place, settling the asset and management team, and given our liquidity requirements over the years, we felt this was a good time. It took us quite a bit of time because it's a complex deal, especially with multiple shareholders trying to sell together.”
ILLIQUID INFRASTRUCTURE
As a declining fund, State Super must balance its current assets against future member obligations. This challenge is particularly acute for long-term, illiquid assets like infrastructure investments.
"In terms of our assets, we need to have a plan to liquidate them in a considered fashion ahead of when we will need the money to pay out benefits."
While stating that future infrastructure investments were unlikely, Livanas said there are no absolutes.
"I can't say never, but it's highly unlikely. To the extent that we've understood what the exit looks like, there are some securities out there that we could look at that are more liquid, that we can get in and sell within five years," he said.
Contrary to public perception, holding infrastructure assets requires a lot of engagement and active business management.
"When you're buying infrastructure assets, you're actually buying businesses as well. You need to be able to understand them as businesses, because they actually do lots of transactions for which you're responsible."
"It's not a passive investment like when you buy BHP shares, so you've got to be much more deliberate when you buy it. There's much more due diligence that you have to do, and you've also got to be much more deliberate when you sell it."
This level of active management is particularly challenging for a closed fund like State Super, which must balance these demands with its declining asset base.
Editor's note: The title of this story has been updated.