“The only thing they didn’t have 10 years ago was expertise.” For VFMC and Teachers’, the Birmingham Airport transaction was straightforward: the asset was “simple” and already being competently run, the investors’ expectations were broadly aligned, and they had candidates for the two seats to which they were entitled on the airport’s board – one to contribute to the operations of the airport and another to watch the investment on VFMC and Teachers’ behalf. The two funds formed a special purpose corporation, Airport Group Investments Limited, to invest in the company.
This new entity then became a long-term partner with the District Councils in the West Midlands of England, which owned the remaining majority stake. These existing shareholders were initially uncomfortable with the funds’ advance on Birmingham Airport, fearing they would bail out and not be long-term asset owners. “They tested us out on that one,” de Bever says, before allowing that the $23 billion UniSuper was also a party to the deal in its early days before withdrawing as discussions gained momentum.
In direct co-investments, trust among the parties is as important as aligned views and adequate resourcing. “While you’re doing the deal it’s incredibly important that people are on the same wavelength,” de Bever says. “Negotiations tend to go through the night, and decisions can happen at 3 in the morning.” Provisions in the contract attempted to mitigate any subsequent disputes, or failing that, allowed for an early exit. Such provisions can become more complex as the number of co-investors grows, de Bever says, and funds should assume that a greater number of investors will create a more complicated deal.
“You can’t have too many partners. If you have more than two or three, the likelihood of views becoming a problem starts to increase.” The partners must be well-resourced in order to perform analysis of the asset, monitor it through its lifetime, and investigate future deals. When the stake in Birmingham Airport was acquired, VFMC had an infrastructure team of six; Teachers’ had nearly five times that number. “The need to supervise [the asset] requires a bigger staff… All the energy just can’t go into buying this stuff – then you have a portfolio that you have to manage,” de Bever says.
He says funds need the scale of US$50-100 billion under management to build such capabilities, particularly since it was usually necessary to pay commercial rates for good talent. It should also be noted that when funds collaborate, the resources committed to the deal at hand are strengthened as two teams combine to do the work. But some obligations arising from direct ownership of an asset, such as operational skills for an airport, will probably need to be outsourced. “Pension funds don’t have a natural operations expertise,” de Bever says.