CP2’s Holloway back on track

It was a childhood on a rice farm in Deniliquin in the southern corner of NSW that taught Sally Holloway the virtues of planning for the long-term.

You have to be sustainable when you grow up on a farm,” says chairwoman and managing director of CP2, the investment group that put together a surprise $2.2 billion bid two years ago to take Melbourne toll road operator ConnectEast private.

Source:: Australian Financial Review
Author: Jenny Wiggin, and Sally Patten

“You learn about cycles. The whole of the market is about cycles, about being patient: The ConnectEast deal, which involved gathering eight foreign pension funds together in a consortium to buy out the owner of the EastLink toll road, was a coup for both CP2 and its clients which now collectively have full control of a key infra-structure asset. CP2, which already owned one-third of ConnectEast on behalf of three of the eight funds before making the bid, spent several years preparing for the bid.

Ms Holloway and CP2’s former managing director, her husband Peter Doherty -who died in early 2011 from a melanoma before the ConnectEast bid was made-travelled to Korea in 2009 and 2010 to meet with the Korean government

“They were interested in our thoughts on how Australian infrastructure was made up because it was quite different in Korea where the government guarantees returns.”

The Korean Teachers Credit Union, one of Korea’s biggest pension funds, along with Korean financial services group Mirae Asset Maps Global Investments are now stakeholders in ConnectEast, along with funds from Britain, the US, New Zealand, China, Denmark and the Netherlands.

Since ConnectEast, CP2, which manages some $2.7 billion in funds, has only completed one major deal – the sale of Brisbane’s Airtrain for $109.5 million in December to its oldest client, Britain’s Universities Superannuation Scheme.

There has also only been one investment -the 95 Express Lanes toll road project near Washington DC with investment partner Transurban.

Ms Holloway acknowledges it has been difficult regaining momentum since Mr Doherty’s death. “It’s only now, two years since his passing, that we’re confidently moving out,” she says.

But she remains proud of CP2’s list of blue-chip clients which even competitors acknowledge is without peer. “We don’t have a huge number of clients but they trust us,” Ms Holloway says.

CP2 started out in the late 1990s as Capital Partners, an independent research group specialising in infrastructure for 54 clients (it rebranded to CP2 in 2008.)

“Peter thought Australian companies deserved better research,” Ms Holloway says. “People said, you are really good at this, you should manage money yourself.”

In 2005, CP2 accepted a $250 million global infrastructure investment mandate from the New Zealand Superannuation Fund, spearheading its evolution into an investment manager.

While CP2 prides itself as being “under the radar” and is committed to finding new opportunities for existing clients, it is keen to add Australian clients and market itself more. The group is currently developing a new product – an unlisted fund for global listed stocks – but infrastructure investors says it remains an open question how CP2 will thrive and prosper in an increasingly competitive market.

Other funds have followed CP2’s move into infrastructure, with Australian super funds attracted to infrastructure as an investment class, targeting assets such as ports, roads and gas pipelines that offer long-term stable returns linked to inflation.

Not-for-profit industry funds can have as much as 30 or 35 per cent of their balanced portfolios invested in unlisted assets, which includes infrastructure, up from an average of about 20 per cent in 2006.

Some master trusts, such those operated by Mercer and AMP, are also increasing their allocations to infrastructure, although others avoid the investment class because they prefer to hold assets that are easily bought and sold, like shares and bonds.

Ms Holloway, who plans to continue as managing director as well as chairwoman in the foreseeable future, says investments such as airports, roads and utilities will remain core to CP2, and that the group believes can prosper by focusing on undervalued assets. “You don’t have to be everything to everybody.”

People who worked for CP2 during the 2000s say it attracted intelligent people who worked as a team carefully analysing investments, although many of the group’s infrastructure specialists left for other firms during the global financial crisis, with CP2 now managed by a team of four based in Sydney, Rotterdam and London.

Although CP2 never made the heady returns of other infrastructure investors like Macquarie, it avoided going bust like Babcock & Brown and avoided failed toll roads like RiverCity’s Clem Jones Tunnel, the Cross City Tunnel and the Lane Cove Tunnel.

Since the inception of CP2’s funds business, it has generated annual investor returns of 8.4 per cent, and has a one-year annual return of 19.88 per cent.

We don’t have a huge number of clients but they trust us.
Sally Holloway, CP2

Mr Doherty, known for being an innovative thinker, soon developed a reputation as being tough on people who didn’t view the world in the same way he did.

These included the management of Transurban, which CP2 quickly bought into after setting up its investment business. It eventually becoming one of the Melbourne toll road group’s largest shareholders with a stake of around 13 per cent.

When CP2 teamed up with two of Canada’s biggest pension funds, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan, to make a $7.2 billion takeover bid for toll road group Transurban in early 2010, valuing it at $5.57 per share, Mr Doherty lambasted executives for spending too much money on buying the Lane Cove Tunnel. Mr Doherty argued that Transurban’s board, then led by chairman David Ryan, was not acting in the best interests of shareholders and should concentrate on providing dividends instead of making acquisitions.

Ms Holloway describes Mr Doherty as a visionary who was quick to spot the potential of investments like Transurban, which under the chairmanship of Lindsay Maxsted has focused on organic growth.

Although CP2 has sold down its stake in Transurban following the ConnectEast deal because its clients want to diversify away from Victoria and toll roads, the stock has proved a good investment, with shares now trading at record levels of around $6.92.

Dennis Cliche, ConnectEast’s managing director, says he is happy with the group’s evolution into an unlisted entity since the CP2 takeover.

Previously, investors wanted to know what was new in the business, whereas now they want to have long-term discussions about whether ConnectEast, which expects to benefit from the development of Melbourne’s East West Link project, is on track with where it ultimately wants to go.

“They’re not in it for any quick hits, they’re not looking for a quick price movement to change their holdings or their positioning. It’s easier to manage, you’re not trying to make anything dramatic happen in the short-term.”

“Everyone now on our board is an infra-structure specialist of one kind of another so they have a big picture view on what’s happening and where things are going, which was a dimension – when we were listed -that our board didn’t have.”