Felicity Gates Co-head Citi Infrastructure Investments

What happened in the Australian infrastructure market in the early 1990s?
In the early- to mid-1990s, a number of things happened. On the one side in Australia, you have the fourth largest pension fund market in the world, which is astounding when you think that the population of Australia is only 20 million people. It is also the fastest growing pension fund market and the reason for that is the compulsory contributions to the superannuation (pension) funds, which had been mandated in the early 1980 s. It was a big pool of money and a fast-growing pool of money.

On the other side of the equation, the Victorian state government had a very bad debt rating. There was a change of government there and the new premier came in and said, 'OK, we need to pay down debt. We're going to privatize our energy industry in this state.‘ So they they split the utility into several business, including five electricity distribution businesses, several generators and a gas transmission business— which they sold.

At the same time the federal government decided that it wanted to bring overseas operators into its major airports. It wanted world's best practices and commercial competition between what really are monopoly assets. So its way of doing that was to sell the 22 airports that it owned. It started that at the same time the Victorian government was selling its energy industry, at the same the New South Wales government was allowing private sector development of toll roads and at the same time the Victorian government decided it was going to do the same thing with a major toll road. And there were a number of other state governments that decided to allow private investment in the building of schools, water treatment plants, hospitals and prisons. All of this came about on the supply side at the same time there were a lot of sophisticated investors with a lot of cash looking for diversification. So that was basically setting the scene.

What sorts of investment was the New South Wales superannuation fund pursuing when you joined in 1994?
We knew the airports were in the works to be privatized. We thought that they would be very good assets—particularly for the New South Wales pension fund to buy the Sydney airport, which was supposed to be the first airport to be sold. We decided we needed partners and we scoured the globe looking: We basically met with all the different airport operators, who were all coming to look at the market. We decided that the best fit was British Airports Authority (BAA), so at the end of 1994 we teamed up with them and worked through what turned out to be a two-and-a-half year process where we ended up buying Melbourne airport, which was in the first round of privatizations.

What was attractive about Melbourne airport?
It met the strict definition of infrastructure, which is large-capital, physical assets that provide the means to an end, not the end itself. They're very stable and steady businesses and if you look at the long-term traffic history at airports, they tend to survive shocks and the demand for their usage tends to increase at a multiple of GDP. That happens even when you're in a mature market. That proved to be the case after we bought Melbourne airport. We survived both September 11, 2001 and our second biggest airline customer at the airport going bust within the same week. That caused a slight dip in the valuation for a year, but the traffic tends to go back to the previous levels. The fundamental demand was still there.

There were other attractions about Melbourne airport. It had a good diversity of traffic: It has a good mix of people visiting their friends and family, Australians going overseas and people coming in for business. It is very much an origination/ destination airport, as opposed to a hub airport, so regardless of what happens people want to come to the destination. And the way they did the regulations in Australia, there were growth opportunities [in things like parking lots and retail businesses].

Is an airport a real estate investment?
Airports are probably the infrastructure business that has the closest alignment with real estate. You can think of them as a car park on one side, an aircraft park on the other and a shopping center in the middle—with a bit of property development on the land you don't need right now.