News of the New Zealand Super Fund's unsolicited proposal to the Government, offering to invest in the Auckland light rail project, was big news last week.
Our proposal is to form a consortium to fund and deliver the project on a fully commercial basis – from the design and build phases through to operation. No deal has been done, though; we want to further review the entire project to determine commercially feasible options.
So why did we approach the Government about this project? How can investing in light rail in Auckland help fund New Zealanders' pensions?
The fund is already a big investor in New Zealand; we have around 15% of our portfolio here – that's $5b. But we don't have significant amounts invested in New Zealand infrastructure.
Infrastructure is a popular investment because of its attractive, consistent returns and yield; defensive characteristics; and diversification benefits. But long-term investors like the fund are looking for growth assets and the potential for high risk-adjusted returns.
We're also looking for investments that are large enough to make a difference to the performance of the fund – which is now nearly $40 billion. That's why we're attracted to the development risk, size and scale that this project offers.
We also see the potential to leverage our international relationships. We bring investment expertise, local knowledge and existing relationships to the table – but we're not experts in light rail.
Our proposed partner though, Canadian investor CDPQ Infra, is a leading institutional investor with considerable global experience in infrastructure investment and development.
CDPQ knows a lot about light rail – it is responsible for developing, building and operating a 67km light rail network in Montreal, and involved in developing, building and now operating 20km of Vancouver's light rail.
Like the NZ Super Fund, CDPQ is a public fund, managing pension money for the long term. Our investment strategies are a good fit.
The benefit of the fund's involvement is that, as a New Zealand Government fund, any returns it earns will ultimately help fund New Zealand superannuation – we all benefit.
As our proposed investment partner, CDPQ would also share in the project's risks and returns – their involvement means the NZ Government can share these risks with another party.
As New Zealanders, we're excited about the potential to accelerate this project as not just a public transport network extension but as a means to better connect Auckland's expanding population, improve productivity and unlock land areas for residential and commercial development.
While we're aware of these benefits, the fund's involvement as an investor will, however, be solely on a prudent, commercial basis.
We will only invest if we are confident we can get a better risk-adjusted return from this project than our investment hurdle – which takes into account what we can expect to earn on standard, low cost, passive investments in global shares and bonds, and asset specific risks we take on.
So the fund has put its cards on the table. We have a track record of investment success with returns averaging 10 per cent a yea since inception (after costs, before NZ tax), active investments having added $7 billion in value to the fund and are known globally for our commitment to responsible investment.
The Government will now run a process to solicit other proposals for review. We look forward to our conversations with the New Zealand Transport Agency, which is exploring a range of possible project delivery options.
We're confident our proposal is a strong one and are excited about the possibilities
for the fund, for Auckland and for New Zealand.
Matt Whineray is acting chief executive of the NZ Super Fund.