Friday, September 18, 2009

Teachers' Flying Off Course?


The Globe and mail reports that Teachers lands British airport deal:

The Ontario Teachers' Pension Plan stepped into the restructuring of the British airport industry yesterday, increasing its stake in the fastest-growing airfield in the U.K.

Teachers, which already held a 14.5-per-cent stake in Bristol International Airport, bought the 35.5-per-cent stake held by Australia's Macquarie Airports for $225-million. The airport, located about 200 kilometres west of London, is the ninth busiest in Britain.

Ownership of the country's airports have been in disarray since March, when Britain's competition commissioner ordered the country's largest airport operator, BAA PLC, to sell three of its seven properties. Meanwhile, Australian-based Macquarie Airports has been unloading some of its holdings as it reorganizes its portfolio.

While Macquarie chief executive officer Kerrie Mather said the Bristol airport had generated "excellent" returns, Teachers received a 12.7-per-cent discount from the airport's most recent valuation in June.

"Bristol Airport was one of Macquarie's original investments and has generated an excellent return over the period of our ownership," Ms. Mather said. "With the portfolio having grown significantly over the last five years, Bristol now represents just 4 per cent of our portfolio by value, and we feel that our investors are better served deploying our resources elsewhere."

Stephen Dowd, senior vice-president and head of infrastructure investing at the $87.4-billion Teachers pension fund, said Teachers is "an experienced investor in the sector," adding that the asset would be added to the fund's $10-billion infrastructure portfolio, which already includes interests in airports in Birmingham and Sydney as well as holdings at ports, water treatment facilities and toll roads.

As part of the deal, Teachers offloaded its 3.9-per-cent stake in Copenhagen Airports AS to Macquarie for about $120-million.

Airports are seen as stable, inflation-proof investments because they essentially operate as a monopoly in their communities. While airlines desperately try to fill seats through the recession - the International Air Transport Association forecasts its members will lose $11-billion this year - airports earn fees for each plane that lands regardless of the number of passengers aboard.

That's what has Canada's other pension funds - including the Canada Pension Plan Investment Board and the Ontario Municipal Employees Retirement System - watching with interest BAA's appeal of the competition commissioner's ruling. Along with Teachers, they are all thought to be interested in bidding on Gatwick Airport, the second largest in London.

The losers may go after the two other BAA airports that go on the auction block, since no investor can own more than one of the three airports to be sold. BAA also owns Heathrow and Stansted in London, and airports in Southampton, Edinburgh, Glasgow and Aberdeen.

Infrastructure is a hot asset class among Canadian pension funds. Unlike private equity where you are thinking of an exit at the time of purchasing a private company, infrastructure truly is a long-term investment that offers stable inflation-sensitive returns.

But infrastructure deals are not always profitable. Just ask the Caisse who recently announced a $5.7 billion hit , of which private equity and infrastructure investments caused a $1.3-billion hit, with most of that coming from its troubled investment in British Airports Authority (BAA).

Moreover, as more investors pile into this asset class, there seems to be a bubble in developing in private infrastructure:

The problem is that the chief benefit of the investment—a safe long-term inflation-adjusted return—becomes harder to reach as more investors pile into the market seeking it.

Experts worry that prices have already been driven too high for many of the best assets. As evidence, they note that more deals are being loaded up leveraged-buyout levels of debt. At the same time, yield-hungry investors are increasingly willing to build or buy infrastructure in riskier corners of the world.

And it's not just private infrastructure that is getting bid up. According to James Altucher, managing partner, Formula Capital, infrastructure stocks is the next bubble of "mammoth proportions":

Brace yourselves. Only a year after the housing and credit bubble officially burst with the Lehman Brothers bankruptcy, a new "bubble of mammoth proportions" is starting to grow, says James Altucher, managing partner, Formula Capital.

Bubble 3.0 (Internet and housing being bubbles 1.0 and 2.0, respectively), comes thanks to the stimulus bill. "We have a trillion dollars coming. Only 10% of it's been spent. Interest rates are near zero." Altucher's advice: follow the stimulus dollars and invest in the infrastructure stocks that are rebuilding America.

There are many risks in infrastructure and once again what is the benchmark governing these private infrastructure deals? I happen to think it should be a spread over the Macquarie Global Infrastructure Index Series (MGII):
The Macquarie Global Infrastructure Index Series (MGII), calculated and managed by FTSE, is designed to reflect the stock performance of companies within the infrastructure industry, principally those engaged in the management, ownership and or operation of infrastructure and utility assets.
Are Teachers and other pension funds flying off course? Only time will tell but they sure are putting lots of eggs in the infrastructure basket. As with any investment, the benchmark should reflect the beta, credit risk and liquidity risk of the underlying investments. Infrastructure is a long-term asset class but it isn't free of risks and the benchmark must reflect this.

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