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Australian Japan Business Co-operation Committee Viewing Change as Opportunity: Financial Connection Ms Shemara Wikramanayake Head of Macquarie Asset Management 9 October 2017 STRICTLY CONFIDENTIAL The Financial Connection connecting


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STRICTLY CONFIDENTIAL

Australian Japan Business Co-operation Committee

Viewing Change as Opportunity: Financial Connection

Ms Shemara Wikramanayake Head of Macquarie Asset Management

9 October 2017

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PAGE 1 STRICTLY CONFIDENTIAL  MACQUARIE

Wealth Managers Banks Insurers Asset Managers

Identify, shape, de-risk, and add value to investment opportunities

The Financial Connection – connecting capital to investment opportunities

Capital (from savers and nations) Investment

  • pportunities
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PAGE 2 STRICTLY CONFIDENTIAL  MACQUARIE

Changes driving investing environment

Demographics Geopolitics Technology / Disintermediation Regulation

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Quantitative Easing has driven inflation of financial asset values and low volatility but this tailwind is abating

Source: US Federal Reserve

  • 500

1,000 1,500 2,000 2,500

  • 1.0

2.0 3.0 4.0 5.0 2008 2011 2014 2017

Today’s investing environment

Federal Reserve assets (LHS, $tn) S&P 500 (RHS)

S&P500 vs US Federal Reserve balance sheet

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Source: Brad DeLong & Angus Maddison (LHS), United Nations (RHS)

Middle Cohort Population Growth World Population and Economic Growth Outlook

The global “new normal” appears to be an ongoing decline in population and economic growth

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 1950 1980 2010 2040 2070 2100 World Population Growth World GDP Growth Trend World GDP Growth Trend (LHS) World Population Growth (RHS)

  • 1.5%
  • 1.0%
  • 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 1950 1980 2010 2040 2070 Population Growth Period Beginning

Japan Europe China UK USA

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  • 5.00%
  • 2.50%

0.00% 2.50% 5.00% 7.50% 10.00% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Annual Return Yield

Yield on 10-year JGBs has been at zero for many years

Zero Yield Policy

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OECD pension fund assets grown by ~150% in the past 14 years

Source: OECD

10.8 10.3 12.6 14.0 15.0 16.7 18.5 14.5 16.5 18.4 20.0 21.7 24.1 24.0 24.8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Yet global savings continue to grow, with increasing deployment challenges

OECD pension fund assets ($UStr)

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Investors continue high exposure to defensive, lower return investments

Source: Willis Towers Watson and secondary sources 1. 1 DC assets in Switzerland are cash balance plans where the plan sponsor shares the investment risk and all assets are pooled. There are no pure DC assets where members make an investment choice and receive market returns on their

  • funds. Therefore, Switzerland is excluded from this analysis.

2. 2 In January 2017, the UK’s Office for National Statistics stated that the figures previously disclosed for DC entitlements were significantly overestimated. As a result there is a significant decrease in UK DC pension assets this year when compared to the previous editions of this study. This change has a very limited impact on the P7 DC assets; in the order of a one percent reduction.

DB/DC Split 20161,2 Asset allocation 2016

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200 400 600 800 1,000 1,200 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Japan Offshore

Japanese investment in JGBs

(¥JPYtr)

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Source: Macquarie and Bloomberg. For the US based on S&P 500 Index and 10 year US Treasury Bonds, for Japan based on the Tokyo Stock Exchange Price Index and 10 year Japanese government bonds. For Australia based on Australian All Ordinaries index and 10 year Australian Commonwealth Government Bond

2007 Japan - 1989 1987

Risk aversion is a contributing factor

68 21 23 17 Australia US 72 53 40 38 Australia US 287

Months to recover from a crisis: 100% Equities / 60% Equities 40% Bonds

Still Counting

Nikkei is still not back to its 1989 levels

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  • 1%

0% 1% 2% 3% 4% 5%

  • 4%

0% 4% 8% 12% 16% 20% 1822 1834 1846 1858 1870 1882 1894 1906 1918 1930 1942 1954 1966 1978 1990 2002 2014 Equity risk premium World GDP trend (RHS)

U.S. equity risk premium vs. GDP trend

Reward for risk is decreasing in traditional asset classes

Source: Bloomberg, April 2016

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Our industry’s role is to shape higher return investment opportunities for risk

Capital (from savers and nations) Investment

  • pportunities

Wealth Managers Banks Insurers Asset Managers

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The largest contributor to world economic growth is now Emerging Markets

  • 4
  • 2

2 4 6 1991 1994 1997 2000 2003 2006 2009 2012 2015 %

Emerging Markets Growth Developed Markets Growth World growth China Growth US Growth EU Growth

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Source: IMF, MSCI, Macquarie Investment Management

Real GDP growth MSCI Emerging markets benchmark breakdown

What are you getting in Emerging Markets? Asia is a key opportunity

Asia (ex- Japan) 73% Non- Asia 27% Emerging Markets Non-Asia EM Asia ex-Japan 4.5% 1.9% 6.0%

Growth gap

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Travel, language and culture are a significant barrier

Source: Bloomberg

You need to be “on the ground” in Asia

Morgan Stanley Capital International World

 75% in three countries  75% in 2 languages  Easy to cover from anywhere in the world  The “western approach” works

Asia ex-Japan

 11 countries  1,419 cities  Many languages and dialects  Vast cultural differences

US UK

Japan Asia

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1. IMF WEO Database as at 9 December 2016 2. United Nations Department of Economic and Social Affairs: World Urbanization Prospects 3. EY: Hitting the sweet spot - The growth of the middle class in emerging markets (middle class defined as earning $US10-100 per day) 4. World Bank: Global Saving in 2030, World Bank: Capital for the Future - Saving and Investment in an Interdependent World

Urbanisation2 Middle class population3 Total savings4 Share of global GDP1

Asia’s positive long-term outlook will drive infrastructure demand

63% 50% 37% 50% 0% 25% 50% 75% 100% 2015 2030F Asia Global ex-Asia 1.2 3.2 45% 66% 0b 1b 2b 3b 4b 2015 2030F Population % of Global middle class population 2.1 2.8 48% 56% 0b 1b 2b 3b 2015 2030F Urban population % of Asian population 6.7 12.7 34% 44% $0tn $4tn $8tn $12tn $16tn 2015 2030F Savings % of Global savings

640 million people By 2030: 1 billion people in China 475 million people in India

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7.0 Transport 0.7 Water/Sanitation 2.0 Telecommunications 1.5 Renewables 9.0 Electricity

1. Asian Development Bank: “Meeting Asia’s Infrastructure Needs”, 2017; International Energy Agency: World Energy Outlook 2015

Asia Infrastructure Projected Demand for Capacity and Replacement (2016-2030)1

Infrastructure in Asia will require substantial capital

$20.2 trillion

$13 trillion

from China alone

$4 trillion

from India

$3 trillion

from Southeast Asia

Of the $20.2 trillion projected demand…

Resulting to an infrastructure funding gap of

$3-4 trillion

Augmented by robust brownfield opportunities, as a result of

Non-core asset sales and capital recycling for new infrastructure

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Benefits to Investors Characteristics of Infrastructure assets

Why we like Infrastructure Assets

Stable returns and low volatility High yielding Inflation linkage Resilient performance in different economic environments Monopolistic position High barriers to entry Allowed return

  • ften set by regulation

Essential services to the community

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Investors’ needs from their investment portfolios vary

Sub-sector Long duration Shorter OECD Emerging markets Yield Growth Returns / Risk

Debt / Mezz Super Core Core Core-Plus

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PAGE 19 STRICTLY CONFIDENTIAL  MACQUARIE

Making Opportunity from Change

Collaborate

Use innovative partnerships to access appropriate skill and pricing

Be pro-active

Embrace complex assets and situations

Be selective

Participate where competitive edge is clear and there is deep understanding of the asset

Adapt

Create tailored solutions for counterparties

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PAGE 20 STRICTLY CONFIDENTIAL  MACQUARIE

United States ■ Atlantic Aviation ■ Aquarion Company ■ Bayonne Energy Center ■ Broadrock Renewables ■ Cleco Corporation ■ Dulles Greenway ■ Elizabeth River Tunnels ■ Goethals Bridge ■ Harley Marine Services ■ InSite ■ International-Matex Tank Terminals ■ Leaf River Gas Storage ■ Lordstown Energy Center ■ Maher Terminals ■ MIC Renewable Energy Holdings ■ MIC Hawaii ■ NYK Ports ■ Penn Terminals ■ Puget Energy ■ Red Hills Solar ■ Waste Industries ■ WCA Waste

135 portfolio businesses ~300 properties ~4.5 million hectares of farmland

1. As at 30 June 2017. Represents portfolio businesses which Macquarie Infrastructure and Real Assets manages on behalf of investors with various direct percentage stakes held in each. Portfolio businesses shown on the map are representative and not exhaustive. In some instances they represent the operations of a single business where it has operations across different countries.

Macquarie Infrastructure and Real Assets Global Presence1

Italy ■ Hydro Dolomiti ■ Renvico ■ Societa’ Gasdotti Italia S.p.A.

Roads and Rail Renewable Energy Other Transport Services Real Estate Communications Airports Other Real Assets Energy Utilities Waste Agriculture

Canada ■ Autoroute 25 ■ Fraser Surrey Docks ■ GFL Environmental ■ Halterm Limited Mexico ■ Concesionaria Universidad Politécnica ■ Decarred ■ FIBRA Macquarie México ■ Mexican Tower Partners ■ Parque Solar Coahuila ■ San Rafael HydroGen Brazil ■ Cruzeiro do Sul Grãos (3 farms) South Korea ■ AJ Parking Tower ■ Baekyang Tunnel ■ Busan New Port Phase 2-3 ■ Cheonan-Nonsan Expressway ■ CNE Motorway Service Stations ■ Daegil Industry / Daegil Environment ■ Daejon Cogeneration ■ DB Hotel ■ Deok Pyeong Land Company LLC ■ D’LIVE ■ Goyang Bus Terminal ■ Gwangju 2nd Beltway Section 1 ■ Gwangju 2nd Beltway Section 3-1 ■ Hangdarm Island ■ Hanjin Pacific Corporation ■ Incheon Airport Hotel ■ Incheon Grand Bridge ■ Incheon International Airport Expressway ■ Jinju ■ Koentec ■ Machang Bridge ■ Moda ■ North East Chemical ■ Parking Tower II ■ Pyeong Chang Motorway Service Station ■ Saehan Environment Co. ■ Seoul Chuncheon Expressway ■ Soojungsan Tunnel ■ United Terminal Korea Limited ■ Woomyunsan Tunnel ■ Yeongyang Wind Power ■ Yongin-Seoul Expressway ■ Youngduk Wind Power Russia ■ Brunswick Rail ■ GSR Energy Investments ■ OGK-5 ■ Russian Towers China ■ Dallan Hengji Xinrun Water ■ Hengyang Holdings ■ Jinko Solar Power Engineering ■ Longtan Tianyu Terminal ■ Mosaic Xi’an ■ Mosaic Beijing ■ Mosaic Qingdao ■ Mosaic Shanghai ■ Mosaic Chongqing ■ Shenyang Water Treatment Co. ■ Shenyang Zhenxing Environmental Protection ■ Star King ■ Tianjin Port Huisheng Terminal ■ Zhenxing Wastewater Philippines ■ GNPower Kauswagan ■ LRT 1 Metro ■ Negros Island Solar Power ■ NLREC Wind Farm ■ Philippine Coastal Storage & Pipeline ■ San Carlos Solar Energy Australia ■ Axicom Group ■ Endeavour Energy ■ GWA ■ Hobart International Airport ■ Lawson Grains (10 farms) ■ MREEFs ■ Paraway Pastoral (23 farms) ■ Prospect Water New Zealand ■ Oceania Healthcare Taiwan ■ Hanjin Pacific Corporation Japan ■ Central Tank Terminal ■ Hanjin Pacific Corporation United Kingdom ■ AGS Airports ■ Arqiva ■ Cadent ■ Calon Energy ■ Condor Group ■ M6 Toll ■ National Car Parks ■ Race Bank Spain ■ Compania Logistica de Hidrocarburos ■ Viesgo Sweden ■ Arlanda Express Belgium ■ Brussels Airport Germany ■ Open Grid Europe ■ TanQuid ■ Techem ■ Warnow Tunnel France ■ APRR ■ Pisto SAS ■ Renvico Poland ■ DCT Gdansk ■ TanQuid Denmark ■ Copenhagen Airports Slovakia ■ EP Infrastructure ■ Vector Parks ■ Towercom Singapore ■ Universal Terminal Austria ■ Energie Steiermark India ■ Adhunik Power and Natural Resources ■ Ashoka Concessions ■ GMR Airports ■ Gujarat Roads & Infrastructure Corp ■ Ind-Barath Energy ■ MB Power ■ Soham Renewable Energy ■ Swarna Tollways Private Limited ■ Viom Networks Portugal ■ Viesgo Czech Republic ■ Vector Parks ■ Ceske Radiokomunikace ■ Czech Gas Networks

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Thank you.