Infrastructure: The Rise of an Asset Class
It’s not the busiest transport hub in the world but Sydney International Airport sees its fair share of traffic. The gateway to Australia, over 35 million passengers a year trudge through its terminals as they make their way onto, or off, one of 900 daily flights. With the city only eight kilometers to the north, the airport is easily reachable but that proximity to residential areas puts it under additional constraints. By order of a strict curfew, Sydney Airport is only able to operate between 6am and 11pm, so those 900 flights need to be squeezed into a 17-hour window. Inclement weather can wreak havoc on controllers’ careful planning.
“Orchestrating the movement of this city within a city is a monumental task,” says the narrator of a behind-the-scenes TV show, Inside Sydney Airport. More than 30,000 people work on the nine square kilometer site and managing them can be a handful. They include ground handlers, cleaners, engineers and caterers; the airport even employs bird watchers to monitor the grassy areas bordering its three runways.
The TV show highlights the various challenges this workforce faces. Torrential rain, a lightning strike on an incoming international flight, security breaches, a luggage system breakdown, a potentially catastrophic fire. “Every second counts and there’s absolutely zero room for error,” duty manager George tells viewers.
What the show doesn’t focus on is just how profitable Sydney Airport is. Before the pandemic, the airport was making A$1.3 billion of profit (EBITDA) on revenue of A$1.6 billion – equivalent to just less than a billion US dollars of earnings. The company that manages it bills airlines for access to its infrastructure, charging for passenger service, runway use and aircraft parking. In addition, it derives significant revenue from retail concessions, property leasing, car rental and car parking (those hefty car parking fees you pay when you enter an airport run straight to the bottom line). Historically, around half Sydney Airport’s revenue came from airline fees, the rest from ancillary services.
Usefully, its income is very stable. In the five years through to 2019, earnings grew at a steady 7% per year. They dropped off during the pandemic – to a low of A$341 million in 2021 – but with latest passenger numbers at 91% of pre-pandemic levels, they are likely largely recovered. Such profitability owes something to the airport’s monopoly status. For now, Sydney Kingsford Smith Airport – as it is officially known – is the only international airport in Sydney (although another is under construction). Where else is the 17.5 hour non-stop UA 101 service from Houston going to land?
These features – stable earnings supported by resilient pricing power – make the airport a very attractive asset for a certain type of investor. And sure enough, in 2021, a group of such investors launched a takeover of Sydney Airport at an equity value of A$23.6 billion (US$17.5 billion).
The group was led by Global Infrastructure Partners (GIP), one of the largest specialists in infrastructure investing in the world. No stranger to airports – they’d bought and sold London City Airport (making 2.8 times their money) and retained stakes in London Gatwick and Edinburgh airports – they made Sydney the largest investment in their fourth fund. Now onto their fifth fund, they manage over $100 billion of assets across not just airports, but renewables, shipping ports, water and waste providers, data centers and more.
Last week, they were acquired by BlackRock in a $12.5 billion deal. “Infrastructure is one of the most exciting long-term investment opportunities,” said Chairman and CEO Larry Fink. “The acquisition of GIP will propel our leadership in a fast-growing market for hard asset infrastructure.”
He’s not wrong about how fast it’s growing. In 2017, $729 billion of funds were allocated to the asset class globally; by 2022, the figure was $1.2 trillion and, according to McKinsey, by 2027 it will be $2.5 trillion. Investment consultant Mercer recently polled large asset owners asking them which asset class they expect to increase allocations to over 2024. Out on top: infrastructure.
To understand more about this asset class, how it differs from traditional private equity, and how players like Global Infrastructure Partners make money from it, join me through the Priority Lane…