Friday, June 18, 2010

Calpers Buys Stake in Gatwick Airport

Michael Marois reports in Bloomberg Businessweek, Calpers Buys Equity Stake in London’s Gatwick Airport:
The California Public Employees Retirement System, the largest U.S. public pension fund, is buying a 12.7 percent equity stake in London’s Gatwick airport, according to two people with direct knowledge of the sale.

Global Infrastructure Partners, a buyout firm that purchased Gatwick in 2009 from BAA Airports Ltd., will sell a 106-million-pound ($157 million) stake to the pension fund, according to the people, who spoke on condition of anonymity because they weren’t authorized to release the details. Gatwick is the U.K.’s second-largest airport and the busiest single- runway airport in the world.

New York-based GIP, which is backed by Credit Suisse Group AG and General Electric Co., said in December it intended to sell stakes in the airport this year after purchasing Gatwick for 1.51 billion pounds. Calpers, as the $203.6 billion fund is known, has been adding to a new asset class intended to hedge against inflation by investing in commodities, timberland, inflation-linked bonds and infrastructure such as power plants, airports and toll roads.

In March, the pension fund said it intended to allocate as much as $1.3 billion this year to its infrastructure financing program, including as much as $900 million in funds that invest in infrastructure assets and another $400 million directly into such projects. The inflation-linked asset class will eventually encompass as much as 5 percent of assets.

Airport Sale

The airport was offered for sale last year as Britain’s Competition Commission pondered a breakup of BAA to reduce the company’s dominance of the U.K. market. In February, GIP said it was selling stakes of Gatwick to the Abu Dhabi Investment Authority and to Korea’s National Pension Service.

Andrew McCallum, head of communications for Gatwick, referred questions about the sale to GIP. Jack Cowell, a spokesman for GIP in New York, didn’t immediately respond to a call seeking comment. Brad Pacheco, a spokesman for Calpers, declined to comment.

This might turn out to be a good deal for Calpers. Ontario Teachers', who is a lot more experienced in infrastructure investments, recently increased its stake in Bristol International Airport, a sign of confidence in British airports.

Infrastructure is indeed a burgeoning asset class and more pension funds are looking to aggressively allocate to these investments. Unfortunately, few have the investment staff to fully understand the risks of infrastructure investments and how to properly structure these deals.

***Different take on this deal****

Nice to have some divergent feedback:

This a sell down of a risky investment by an investment bank led group, who essentially underwrote the equity to get the fees and senior loans, and then sells on with a promoted arrangement to the funds that believe infrastructure is low risk. Not much different than packaging CDOs and selling into "asset class" oriented investors who once a mandate is invented simply fill up the bucket.

Why would you say this might be a good deal? Is anything with infrastructure in the name a good deal? What is the success at OTPP which suggests they have unique expertise? The Calpers fellow executing this has more experience than anyone at OTPP (and who over there is actually the infrastructure expert?) The only infrastructure investor success in Canada was some older deals done by OMERS, and even they have not closed anything of note in this area in some time. Infrastructure was and remains an academically appealing asset class, with horrible execution and frothy market outcomes, which will cost institutions dearly over time. Ask the Caisse how its airport investment in the UK turned out...

Just thought you enjoy a different take on things.

So what should be invested in? Greenfield projects, development and venture capital, some forms of mezzanine debt in established business, and very select large scale buyout driving industry consolidation and capacity reductions. Throw in some automotive turnaround investment, hold lots of bonds and stay away from emerging markets, and there is lots of useful things to do. Infrastructure trading of built assets at low underwriting rates of return is not on the list...

Some more feedback on this infrastructure deal:

All very good points. I think that your comment regarding infrastructure deals is more than fair.

My experience is that there is value in these deals but that the deals themselves are very poorly structured.

The underlying question is if the deals are structured poorly by choice to generate volume or is the poor success rate in this asset class a consequence of inexperience.

My view is that incompetence is high in this industry if you compare to other sectors like power. This incompetence is due to the growth of the sector over the last 10 years and younger inexperienced recruits are leading larger deals.

Also, Infrastructure has its fair share of snake-oil salesmen as well.

When you combine all of the above elements, you have the ideal recipe for some major-league train wrecks. I happen to be living in one today.

My advice to Canadian pension funds is to pick partners carefully. Also, avoid making the fatal mistake of staffing deal teams with ex-bankers only. I find it amazing that institutions making long tenor investments hire staff whose experience ends at financial close when the investment has another 30 plus years to go before it matures.

What is even worse is when they convince themselves to put the same people on the Board of the operating company.

Anyway, a few thoughts from the trenches ...

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