The New York Times

Is It Time to Add a Parking Lot to Your Portfolio?
Ryan Donnell for The New York Times

Servicing corporate jets, like this one in Philadelphia, is one of the infrastructure businesses run by a Macquarie investment trust.


Published: December 31, 2006

A PARKING lot near the Philadelphia International Airport offers a host of high-end services: valet assistance, online reservations, even a loyalty rewards program. But the niceties can’t hide an outback location. Tucked between Interstate 95 and a field of chemical storage tanks, it lies at the end of a boulevard lined with body shops and strip clubs. About a mile from the airport’s terminals, it’s an alternative to the more costly municipal parking choices there.

The lot and dozens like it around the United States are owned by the Macquarie Infrastructure Company, an investment trust directed by the Macquarie Bank of Australia. The trust, which buys entire businesses, is among three Macquarie affiliates — the others are closed-end mutual funds — that trade on the New York Stock Exchange.

This Aussie trio gives retail investors the chance to invest in infrastructure — a more formal term for workaday enterprises like parking lots, toll roads, bridges, airports and aviation services.

This year, the Macquarie Infrastructure Company returned 15.2 percent, compared with 13.6 percent for the Standard & Poor’s 500-stock index. Macquarie’s two closed-end funds in the United States are Macquarie Global Infrastructure Total Return, up 38.4 percent this year, and Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income, up 16.2 percent. (Macquarie Bank is the subadviser of the second fund for First Trust Portfolios of Lisle, Ill.)

All three have been listed in the last three years, and neither of the closed-end funds can hold shares of the trust. All three are distinct from the Macquarie Infrastructure Group, which trades in Sydney and has made several high-profile investments in American highways, including the Indiana Toll Road, the Skyway in Chicago and the Dulles Greenway in Virginia.

Macquarie Bank says parking lots and roadways are potentially as valuable as oil pipelines or electric companies. It views a private parking lot, for example, as operating much like a utility: throwing off lots of cash, increasing its rates as the economy grows and often chugging along with little direct competition.

Macquarie Bank holds a dominant position in this fledgling niche. It invests worldwide through more than 30 listed and unlisted funds and manages more than $35 billion worth of infrastructure equity. Its success has spawned imitators: such well-known firms as Goldman Sachs and the Carlyle Group have been creating infrastructure funds, typically geared to institutional investors.

Some analysts raise questions about the amount of debt sometimes carried by the Macquarie Infrastructure Company for acquisitions and the fees Macquarie Bank charges for the management and investment banking provided to its United States affiliates. Before a recent secondary stock offering, the Macquarie Infrastructure Company had a debt-to-equity ratio of 2.49, compared with 0.73 for the average company in the S.& P. 500, Reuters said. A higher ratio indicates potentially more risk for investors.

And Macquarie Bank charges its affiliates handsomely for its services, as when the Macquarie Infrastructure Company hires the bank when acquiring assets. The fund also pays a flat management fee as well as a chunk of its profits to the bank.

Ted Gardner, an analyst based in Houston for Raymond James Financial, compared the compensation arrangement to that of a private equity firm. “They’re definitely taking care of themselves on the advisory fees,” he said. But the Macquarie Infrastructure Company has a longer investment horizon than private-equity competitors. “They’re not trying to get out in five to seven years,” he said.

Even a fan said that the bank receives a lot for what it gives. “The fees are rich, but most of them are performance-based, and as a result, I think they earn what they get,” said Donald B. Gimbel, senior managing director at Carret Asset Management in New York.

Macquarie defends the fees and its use of debt, pointing out that the fees depend largely on its performance and that its steady assets generate plenty of cash for debt repayment.

No one questions Macquarie’s smarts in infrastructure. It was a pioneer in this area; Australia’s government was one of the first to privatize roads and airports, helping to create the niche. The company has grown into Australia’s largest investment bank on the strength of its international expertise.

“They’ve got people looking at deal flows worldwide, and they’re very good at locating deals,” said Babak Zenouzi, senior vice president and portfolio manager at Delaware Investments in Philadelphia. “Then they’ve got 450 or so people who help manage the assets.”

Macquarie executives say infrastructure is a new asset class, deserving a place in investors’ portfolios alongside the usual stocks, bonds, cash and real estate. According to this line of thinking, the durability and stability of the assets protect against the zigzags of stocks and bonds. In other words, London Bridge may fall down, but only long after Enron has crashed. Infrastructure can help to hedge a portfolio against inflation, said Martin A. Jaugietis, a senior consultant in the asset consulting group at Towers Perrin. “When prices rise, infrastructure assets tend to be able to increase prices in concert,” he said. “The cash flows are similar to the rent you’d get from a building.”

But Alan J. Marcus, a finance professor at Boston College, questioned whether infrastructure assets were “enough different that they warrant separate treatment” in a portfolio. “I doubt that this would be the case for most investors,” he said. “Gas versus electric utilities also are different, but would anyone make a case that they provide important opportunities for diversification?”

Macquarie’s work with toll roads and airports tends to grab attention, but its American mutual funds also own hefty stakes in utilities and related businesses like gas pipelines. At the end of August, for example, about three-fourths of the money in the Macquarie Global Infrastructure fund was invested in utilities or pipelines.

Although Macquarie says its closed-end funds belong to a unique asset class, some analysts see similarities to utility funds. “An easy way to think about Macquarie is as a utility player,” said Norman Young, an analyst at Morningstar in Chicago.

Jon Fitch, portfolio manager for Macquarie’s American closed-end funds, points out that utilities share a lot of characteristics with roads, bridges and airports. “If you look at what infrastructure is, it’s really the hard assets that provide essential services to a community,” he said. “It includes energy infrastructure like pipelines and power transmission. What we typically avoid are competitive types of businesses” like unregulated power generation.

Even the Macquarie Infrastructure Company trust, which collects much of its income from selling fuel for private aircraft, owns a natural-gas company in Hawaii.

A trait of Macquarie’s American offerings — and an attraction for income-oriented investors — is their high yield. Consider the Infrastructure trust. As a matter of policy, it pays out most of the cash its businesses generate, resulting in a yield of 6.2 percent. Each of the closed-end funds has a yield of more than 5 percent.

Holding little cash leaves scant room for mistakes or economic shocks, but it also disciplines Macquarie Infrastructure, said Josh Peters, editor of Morningstar DividendInvestor. “When they want to make acquisitions, they have to go to the capital markets, and that gives the market a veto,” he said. “If the market doesn’t like what the management has done,” the market “might be closed,” with investors unwilling to provide more money.

So far, the market seems impressed. This fall, Macquarie Infrastructure was able to raise $291 million in a secondary stock offering. It will use the money to pay off debt from a recent spate of acquisitions. And it will continue to prowl for future deals.

“People in the United States are used to infrastructure assets being in public hands, but that’s changing,” said Peter R. Stokes, chief executive of Macquarie Infrastructure. “Municipalities are challenged for tax revenues, and they’re evaluating what they’re spending money on.”