The finger pointing continues on how Hastings, one of Australia’s biggest and oldest infrastructure GPs, came to such a messy end, writes Shaun Drummond
Hastings Funds Management’s impending demise in its Australian home base has shocked the tight-knit world of infrastructure managers after more than a decade of uneasy ownership by Westpac Banking Corporation.
In April, unitholders in Hastings last remaining large fund in Australia, the AUD 6bn (USD 4.7bn) Utilities Trust of Australia (UTA), will vote on whether to accept the plan to transfer its mandate to HRL Morrison & Co. That follows a tender run since early December in which the New Zealand-headquartered manager beat a list of heavyweight suitors, including IFM Investors, Macquarie and QIC. A 75% vote is still needed to accept Morrison & Co, but most see this as a rubber stamp.
The vote will see Morrison & Co take back control of some assets it previously held under its former listed vehicle, Infratil Australia, which Hastings acquired from it in 2000. But Morrison & Co will pay nothing for those rights.
The result was the culmination of several sale attempts by Hastings’ parent Westpac that stretch over three years, with suitors pulling out twice. The third attempt saw the UK’s Northill Capital agree to pay about AUD 150-160m for Hastings on 3 November last year. Morrison & Co also bid then, as did Macquarie and Hastings’ founder, Mike Fitzpatrick.
But Northill failed to convince UTA to stay with Hastings. The UK manager has ended up with just Hastings’ smaller UK and US debt and equity investing businesses and paying a “materially” lower sum, according to sources.
It is perhaps a measure of how unhappy the UTA unitholders were that they will have to pay about AUD 160m to Hastings in termination and accrued performance fees. Westpac, it seems, was always going to get paid – either by a new owner or from UTA paying out Hastings.
Foundations pulled from founding fund
Hastings was a pioneer of the infrastructure investment industry when it was established by former Australian Rules football player Fitzpatrick in 1994. He sold out in 2005 when Westpac, which had already taken 51% of the business in 2002, took full control.
UTA was Hastings’ foundation trust. After managing it for 23 years, since late 1994, UTA was also Hastings’ last support.
But it was The Infrastructure Fund’s (TIF) vote to dump Hastings as its manager which started the rush for the exit. Hastings held the mandate for the AUD 2.4bn TIF since 2000.
Jonathan van Rooyen led a review into Hastings’ management which culminated in TIF’s board voting to end the relationship in late August 2017. Van Rooyen jumped from managing TIF at Hastings to general manager, investments at TIF, in October 2016.
He told Inframation at the time the change came down to unitholder control and alignment with Hastings’ management with TIF unitholders, as well as fees.
“This decision allows TIF to pursue its strategy and create its own identity, as separate from Hastings’ strategy,” he said at the time. “It enables a climate for us to have more transparency with our unitholder base on how we fund the growth initiatives in the TIF portfolio,” he added.
TIF is understood to be close to resolving whether to go with a new manager or manage the fund internally.
Australian superannuation funds have become more and more intent on pushing down GP fees as they have grown in size and expertise. The larger outfits have set up internal teams to bypass the middle man. This pressure has grown more acute as LPs have been forced to cough up big bucks for core infrastructure in recent years.
As the Hastings sale process dragged on, claims that its fees had not responded fast enough to these demands emerged, despite reductions several years ago. Hastings’ management fees were said to be above 1% for large accounts, while rivals have pushed well below 1%. Some have also slashed performance fees.
Several current and former Hastings senior management have disputed this.
But whatever the reality, the pressure to cut fees has worked. UTA’s new deal with Morrison & Co is understood to halve the management fee to about 30 basis points with no performance fee, albeit this is with no immediate plans for any further investments.
Several sources inside and outside Hastings say lowering management fees was not enough of a reason for dumping Hastings, especially as Northill was negotiating lower fees and a new structure for the Trust.
“I have not seen any fund manager dropped due to fees,” one non-Hastings source says. The issue is what people are getting for their fees he adds. “Are they seeing active asset management? Are they seeing operational expertise brought to bear on the portfolio? These issues are much more relevant.”
The source argues there were and are good people in Hastings but with “terrible” incentives. “I think there were probably overall issues on whether they were focused on investment outcomes or their own financial outcomes. They were encouraged to grow funds under management, rather than client outcomes.”
At the time Hastings lost the TIF mandate, then Hastings CEO, Andrew Day, pointed out that TIF’s annual returns averaged 12.8% over the 17 years Hastings managed its assets. Day left the role at the end September.
Sources close to UTA also admit Hastings had delivered good returns to unitholders over its history.
But TIF and UTA, it is argued, were understandably worried about what they could expect from future investments.
Questions were privately raised about a series of large investments, acquired at high prices in a highly competitive market which had seen TIF and UTA’s assets under management bulge.
Hastings used funds from both TIF and UTA to buy Port of Newcastle for AUD 1.75bn in May 2014, alongside China Merchants Group. The price is understood to have been AUD 500m more than the underbidder.
The new owners are understood to have later raised the value of the asset and controversially hiked charges by 40-60% to coal miner customers including Swiss giant Glencore. A federal court battle ensued, which Port of Newcastle ultimately lost when the court handed down its verdict on 16 August last year. This gave the Australian Competition and Consumer Commission the right to arbitrate port fee disputes.
Another deal that was said to have troubled some conservative investors in UTA is the AUD 2.6bn paid for the NSW land titles office – the Land and Property Information service. Some still question whether this is really infrastructure.
One rival fund manager involved in the bidding for UTA’s mandate claimed recent Hastings purchases didn’t stack up against older ones.
“We put their vintage year returns against our own. Deals done in the early 2000s were good, everything since 2005 has underperformed,” he claims.
Present and former Hastings staff argue that criticisms over fees and investment decisions were spread by rival funds and unitholders in UTA and TIF to force changes to the UTA structure and fees, gain control of the sale and deliver it into the hands of rivals.
They point out they are not alone in paying high prices in the present environment of record low interest rates and inflated asset prices. They argue that Hastings has been well outbid on recent transactions, including the South Australian land titles privatisation. Further, the managers’ fees were not out of kilter with the rest of the market they say. When fees were lowered several years ago, they were criticised by some consultants for doing so.
Numerous sources inside and outside Hastings with direct knowledge of UTA argue its portfolio is largely of a high quality that would be virtually impossible to duplicate for LPs in the present market environment.
Although several unitholders have lodged redemption requests late in February, it is understood some are now seeking to reverse them.
The blame instead is placed on the failure of the first sale attempt in March 2016, when it is understood shortlisted bidders withdrew. Some say this was in part due to the talent departures, although it was officially put down to “internal changes” in the bidders’ asset management businesses. That then compromised later attempts to sell Hastings as the value was walking out the door.
Like any successful fund manager, Hastings experienced its share of departures prior to the commencement of the sale process.
Future Fund CIO, Raphael Arndt, had already left a decade ago, followed by Wendy Norris in 2010. She now heads infrastructure investments at the Future Fund.
But the early stages of the Hastings sale in 2015 and 2016 saw many more depart. Leavers included James Fraser-Smith, who also ended up at the Future Fund working with Norris; Peter Taylor and Richard Hoskins, both now at The Carlyle Group; and Peter Johnston, now a part owner of renewables investor Lighthouse Infrastructure.
Sources close to UTA agree the talent drain in 2015 and 2016 was important. If the first sale had gone ahead, the drain would likely have stopped they say. Shortlisted candidates – understood to include TIAA-CREF and pension fund manager Massachusetts Mutual Life Insurance Company – would have been acceptable as new owners to the unitholders they say.
“The reality is you have to do these sales fast”, says one senior former Hastings figure.
“Westpac really didn’t care that much,” says another. “It was a tiny little investment that they just wanted to get shot of, which is pretty sad for all the good people who worked in the company.”
Westpac maintains it was doing its best to keep Hastings intact. “Westpac was committed to the Hastings business,” says a spokesperson. “There was a significant commitment of time and effort and a genuine desire to take steps to support the business, its investments and staff.”
Other sources close to the sale process say another complication that made it hard to get an appropriate owner was that some rival Australian infrastructure funds were barred from bidding for Hastings for “competitive” reasons.
Politics and personal agendas are also said to have played their part, including union-backed industry funds in TIF and UTA that have long been unhappy with a big bank owning Hastings.
There is a fierce political rivalry between industry super funds and retail super funds backed by the big banks. The unitholders in UTA include some of the largest industry super funds, such as Cbus and HESTA.
After the first sale process failed, one person with knowledge of the matter said: “There was a scramble by the company to hold onto good people after that. The activist investors sniffed the opportunity to seize control. The objective was to drive down fees and they were angry at Westpac.”
Various unitholders in UTA have declined requests to comment on the sale.
In the second round of the sale in 2017, to the chagrin of UTA members, Westpac considered candidates from the property sector, such as Charter Hall Group.
After it withdrew from exclusive due diligence Westpac finally chose Northill in November. A rival bidder said Northill won because it was prepared to “underwrite the risks” in Hastings, including still taking parts of Hastings if UTA pulled the plug on the Australian arm.
But Northill had no infrastructure experience and it is rumoured to have had plans to add Hastings to a real estate investing business. So UTA quickly moved to start the tender process.
“Ownership was the big issue. In many ways the first time the sale of Hastings fell through, that was almost a catalyst for various individuals to react to a situation,” said a source familiar with UTA’s views. “Everyone had expectations that the sale was going to proceed. But a couple of key people from Hastings left. That was a trigger for people to re-think their position and try to find solutions to ownership.”
Should the UTA unitholders vote endorse HRL Morrison, Hastings Funds Management is expected to continue to manage UTA until July.