How to succeed in the competitive US infrastructure market
The past ten to 15 years in the US infrastructure market have been disappointing despite the scale of the market and its well-recognised need for investment. Given the current municipal or state funding models for most US infrastructure, the opportunities available to institutional investors have been limited and the market has remained fairly stagnant. Therefore, it wasn’t a big surprise to those of us in the sector that Donald Trump’s proposed changes – one of the bullish, business-friendly projects fuelling the equity rally – haven’t yet come to fruition. In fact, it feels familiar: Barack Obama also came to office with an infrastructure expansion plan, which was swiftly sidelined.
Nevertheless, it feels like US infrastructure’s moment has arrived. Following the excitement around Trump’s infrastructure improvement plans, global investors turned their attention to the sector. But Trump’s appointment came quite late into our own US infrastructure ambitions. AMP Capital has a strong infrastructure presence in the UK, Europe and Australia (in countries that largely have a successful tradition of public investment in infrastructure); we felt that the US was the last bastion for us and so for the past five years we have been building our team and presence here. Our recent acquisition of ITS ConGlobal, the railroad services and logistics provider, is a product of our strategic decision to buy and actively manage mid-market infrastructure assets in the US. Trump’s plan is not a major factor for us as we seek resilient assets that can be bought and managed whether political progress is made or not.
Whatever happens on the policy front, there is a structural change gradually underway. US infrastructure is severely underinvested and many assets are in noticeably poor condition.The G20’s Global Infrastructure Hub forecasts that $12 trillion needs to be invested in US infrastructure by 2040 and there is currently an estimated $3.8 trillion ‘funding gap’ for the maintenance and development required. Institutional investors are likely to be a source of this required capital.
While federal policy is tricky to predict, we have more confidence in the positive macroeconomic picture. We are bullish on US GDP over the next five to seven years, and a great way for allocators to gain exposure to this trend is to invest in infrastructure assets with a strong correlation to US GDP. ITS ConGlobal, with its business directly benefitting from increased trade and industry, is extremely correlated to US GDP. This attracted us to the asset; from a portfolio construction perspective, we had been looking to add US GDP exposure, and as freight activity reflects the economic environment, ITS ConGlobal’s revenues are accordingly GDP-linked.
Given the extra attention on the US infrastructure market and the lack of opportunities available to investors, the market is competitive. So-called “core” infrastructure assets are the traditional investment route: tollways, roads, gas utilities, ports; large public assets traded mostly between asset owners such as pension funds and sovereign wealth funds, coveted for their predictable earnings over decade-long periods. These deals are rare and highly competitive – especially rare in the US due to its less-established public private partnerships model – and aside from buying well, there’s usually not a great deal an owner can do to improve the modest inflation-linked investment returns. They can be worth their high valuations for certain institutional investors seeking liability-matching returns.
Avoiding the high competition for core assets and their restricted return profile, we prefer assets that meet our definition of ‘core plus’ infrastructure. They have many of the same attributes as core infrastructure – high barriers to entry and a stable cash flow profile, within the sector of essential services – but they are not actually a core asset such as a port or railroad. Here again, ITS ConGlobal is a great example. It’s the lubricant that makes a core asset (the railroads) work – the service-based business that handles container lifting between various modes of transport like rail, truck and ship. It is outside the definition of core infrastructure, but shares many of its advantages. The business itself is robust with a strong operating history, and we see opportunities for growth through international expansion and M&A, which has potential to add significant value in a sector ripe for consolidation.
While we are cautiously excited about the opportunities in US infrastructure, discipline is essential. We identified the investment opportunity in ITS ConGlobal more than two years before we acquired it last month. We benefit from the range of opportunities available to us as a global fund rather than a regional infrastructure fund. This allows us to be selective in a market where there is a lot of dry powder, as well as allocating strategically; for example in this case we elected to add exposure to US GDP given economic trends. As we see more value in the mid-market than in more prominent assets, we have teams on the ground around the world seeking out opportunities like ITS ConGlobal, attaining sector and geography diversification as we acquire assets with a strong return profile and potential for growth for our investors.
Dylan Foo, Head of Americas Infrastructure Equity at AMP Capital
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.