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mso-bidi-language:#0400;}In 2007, two fiduciary funds from different continents executed a
co-investment deal in another continent again, buying almost half of Birmingham
International Airport.
Leo de Bever, one of the key decision-makers in the transaction and now CEO of
the Alberta
Investment Management Corporation (AIMCo), tells SIMON MUMME about the
necessary resources, relationships and disciplines required for co-investment
deals, and the scope for future international collaborations among pension
funds.
When the Birmingham
Airport deal went
through, Leo de Bever was chief investment officer of the $32 billion Victorian
Funds Management Corporation (VFMC). He drew on contacts from his old employer,
the C$87.4 billion (A$99.9 billion) Ontario Teachers’ Pension Plan (Teachers’),
to spearhead the transaction, which saw VFMC and Teachers’ own 48.25 per cent
of the airport in a 40/60 split, respectively. The funds paid $1 billion for
the asset.
The deal made strategic sense from the outset. Both funds held
similar return expectations from the investment (at the lower spectrum of
equity returns, but with less risk) and the resources to manage it, an aligned
investment timeframe, and an interest in driving down the costs of
infrastructure investment. They also had the right connection: a couple of
years before joining VFMC, de Bever had ended a 10-year term as Teachers’ head
of research and economics, and was responsible for its long-term investment
strategy, risk management and real assets.
During his tenure at the Canadian
fund, he hired and trained the infrastructure team that he later worked with on
the Birmingham deal.
“If you know the players it’s easier to achieve an alignment in terms of what you
want as an investment horizon and in return expectations,” de Bever says. “All
of these deals depend very heavily on personalities.” The unlisted assets that
suit coinvestment by pension funds are usually private equity, infrastructure
and timber, he says. Essentially, the deals are outcomes of “like-minded
investors that get together and put money on the table”.
He expects more
co-investments between funds as they continue to build scale in the long-term,
and develop more internal capabilities for investing in illiquid assets. “Last
time around, pension funds were too immature at investing in private equity and
infrastructure to do this on a big scale,” he says. “In the next wave, you will
see combinations of European pension funds and North American pension funds banding
together because the economies of scale are so compelling.
“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.
“We’re not in the widget
business, but someone else might be. We have the capital, and an understanding
of business, but not enough to run it.” By investing directly in
infrastructure, pension funds can save about 10 per cent of the gross return
that would otherwise be forfeited if they entered an infrastructure fund, de
Bever says. The model for direct pension fund investment in large unlisted
assets is evolving, and pension funds now often outnumber funds managers among
the consortiums that bid for large assets.
An example of this is the group of investors
which in February purchased all the common stock of US natural gas company, Puget
Energy, for US$7.4 billion. The investors, which formed Puget Holdings to
affect the transaction, comprised Macquarie Group, the Canadian Pension Plan
Investment Board, British Columbia
Investment Management Corporation and AIMCo. “There is a role for
infrastructure managers to provide expertise and analysis. You can see the
model evolving,” de Bever says.
More recently, AIMCo has discussed co-investing
with pension funds to access absolute return managers and negotiate lower fees.
In the infrastructure sector, however, the opportunities coming on stream now
are not often priced to reflect the global economic downturn and still demand
2007-08 costs, de Bever says. But roads, airports, energy and water infrastructure
still need to be built and maintained.
De Bever thinks the deals on offer today
are too expensive compared to when he first began investing in the market a
decade ago, when it was less efficient and good opportunities arose more
frequently. The pricing of all alternative assets, and fees paid to managers,
will be debated for some time as many investors re-examine what they have
bought, and their reasons for investing in the sector. “One or two years ago
everybody was enamoured with alternatives,” de Bever says. “People forgot that
it’s not the asset that you should be attracted to, but what the asset
provides.”
