CalPERS Strikes Gold in Gatwick Airport

Randy Diamond of Chief Investment Officer reports that CalPERS strikes gold in Gatwick Airport investment:
The value of the 10% investment the California Public Employees’ Retirement System (CalPERS) made in London’s Gatwick Airport nine years ago has skyrocketed, turning an initial $155 million investment into a stake worth more than $1.24 billion.

The disclosure came during the pension system’s semiannual retreat meeting in Santa Rosa, California, last week, during a panel highlighting the importance of infrastructure investments to the $356.6 billion retirement plan.

Small changes at the airport like giant luggage trays designed to help travelers get through airport security faster have meant the airport can accommodate more travelers, increasing landings, departures, and profits, said Adebayo “Bayo” Ogunlesi, chairman and managing partner, Global Infrastructure Partners (GIP). The firm runs the investment consortium that manages Gatwick.

Speaking before a panel, chaired by Paul Mouchakkaa, CalPERS’s managing investment director for real assets, Ogunlesi said while airports can be strong investments, it won’t be easy to find another investment like Gatwick.

For one thing, Ogunlesi said US airports are run by government authorities and are not privatized. He said that restricts the pool of available airports to those overseas that don’t trade hands frequently.

“Airports for sale are very scarce,” Ogunlesi said.

The lack of similar investment opportunities like Gatwick has put CalPERS in a conundrum.

Infrastructure has been CalPERS’s top-producing asset class, but there has been intense competition from other global institutional investors for the best deals. That has meant that infrastructure makes up only around $5 billion of the largest US pension plan’s assets.

Over the last 10 years, the plan’s infrastructure investments returned more than 14% on an annualized basis.

A CalPERS infrastructure report last year cited the “fierce competition for new investments, especially Core” infrastructure, such as the Gatwick investment.

In December 2018, Vinci SA, a French company, agreed to acquire a 50.01% stake in Gatwick for £2.9 billion ($3.7 billion).

Sellers disposing of part of their stake in the airport included the Abu Dhabi Investment Authority, the National Pension Service of Korea, and Australian’s Future Fund Board of Guardians.

Ogunlesi told CIO that CalPERS decided not to sell its interest.

CalPERS officials did not discuss why they decided to hold onto their investment while other institutional investors have decided to partially cash out.

“CalPERS is a long-term investor, and it makes sense for them to continue to own it because this airport will continue to do well,” Ogunlesi said.

He said Gatwick has been in an unusual position to grow because larger Heathrow Airport is already at flight capacity.

“London is the largest airport market for origin and destination flights from around the world,” he said.

Ogunlesi said when CalPERS and the other investors originally bought Gatwick, the airport saw 32 million passengers per year.

“Now it’s 46 million passengers a year,” he said.

In addition to the rising value of its investment, CalPERS also earns a revenue stream from the airport.

The airport in its annual report said it earned £411.2 ($514.2 million) in the 12-month fiscal year that ended on March 31, 2019.

That would give CalPERS a $51.4 million return in investment income in the 12-month period, not counting any fees paid to GIP.

Ogunlesi said Gatwick plans to spend £1.11 billion ($1.38 billion) in the next five years to expand its two terminals and convert an existing standby runway to handle more flights.

Gatwick currently has only one operating runway.
Gatwick has been an incredible investment for CalPERS even after accounting for fees it paid out to Global Infrastructure Partners (GIP).

Unlike CalPERS, most of Canada's large pensions buy direct stakes in infrastructure assets through their specialized platforms -- wholly owned subsidiaries (companies) that manage specific infrastructure assets (like airports, ports, toll roads, etc.)

And Canadian pensions have also made great returns on airports. For example, Ontario Teachers' made a boat load on Brussels, Copenhagen, Bristol and Birmingham airports, all of which were marked in the last three years at materially higher values.

But now that airports have been re-rated and are considered core infrastructure assets, the returns going forward are likely to be much lower.

In fact, one expert told me: "Airports used to be on the periphery of what was considered infrastructure and now they are viewed as core and the valuations and expected returns reflect this."

Still, a strong global economy, more baby boomers traveling, the rise of the middle class in emerging markets like India and China, all bode well for air travel in general and that should support strong airport revenues for years to come.

Are valuations stretched and is competition fierce? You bet. Also, as the article above indicates, there are no airports for sale in the United States and they infrequently change hands overseas.

This is the basic problem, lack of supply and fierce competition are driving prices higher and higher and that will impact returns going forward. 

This is where Canadian pensions with specialized airport platforms have an advantage over others who do not have dedicated resources to manage airports properly, adding value-add in every aspect of an airport.

Below, with 24,000 staff working at the airport, it's team work that keeps Gatwick Airport operating operating safely 24/7 as the world's most efficient single runway airport.

Also, have you ever wondered just how many planes take off from the World's busiest runway at Gatwick? Here's your chance to take a look.