Why did the Manchester Airports Group go into partnership with Industry Funds Management earlier this year? DAVID ROWLE Y spoke to both sides of the deal.
There is not enough infrastructure for Australian superannuation funds to invest in. Governments find the transactions difficult to explain to the public, while other owners of infrastructure are wary of short-term partnerships.
The purchase of Stansted Airport, which started with an arrangement between the Manchester Airports Group (MAG) and Industry Funds Management (IFM), is a major success for Australian superannuation and would appear to point the way forward.
The clue to its success is in the way both describe the deal: as a partnership. The first requirement for MAG was a long-term investor who could help them in running airports. Charlie Cornish, chief executive of MAG, says: “We scored IFM above other bidders on key quantitative and qualitative factors including investment philosophy, partnering approach, commitment to a lengthy and complex two-stage transaction and the capability of adding value in both the Stansted acquisition process and ongoing asset-management contribution.”
IFM was one of around 20 major funds that entered into discussions with MAG. Other interest came from pension funds, sovereign wealth funds, private equity groups and infrastructure specialists. A small number dropped out at this stage due to lack of long-term financing capacity or uncertainty over Stansted. Next, MAG invited five funds to tender. “The funds participating in the final stage were credible and motivated,” says Cornish. “Ultimately, we selected IFM over other bidders on account of its approach to commercials, winning Stansted and our perceptions of their long-term partnering philosophy.”
Michael Hanna, head of Australian infrastructure at IFM, confirms the depth of the search that led to IFM being chosen. “Our story and our unique alignment with investors resonate well overseas. If you speak to Charlie about this, he had the pick of any investor around the world and he picked us.” IFM’s $2.3-billion funding came in return for a 35.5-per-cent equity interest in Manchester Airports Group, which also runs Manchester Airport, East Midlands and Bournemouth airports. The other investors in this group are Manchester City Council and nine local councils.
One of the attractions for infrastructure owners in seeking funding from IFM is that it is not looking to exit after five or 10 years, as is common among managers that operate a private equity-style funding model. “We are seen as relatively conservative, but we are investors with deep pockets,” says Hanna. “This is exactly what Manchester Airports Group want: someone who can guarantee to be there for the long term and not leave after five or 10 years.” IFM’s profit model was also appealing to MAG. “We are not here to make ourselves rich: we are here to maximise the returns to investors.
There is no big fee or related party fees or paying fees for getting out of bed for managing assets. Other managers have a lot of mouths to feed; we have got a very simple and clear business model. We pay our staff well, but that is it.” A business model not seeking to generate profit for external shareholders can enable it to outbid fund managers, claims Hanna. Cornish agrees. “While other funds may not have understood the value in the MAG/Stansted proposition, IFM had the conviction, based on a robust analysis of risks and opportunities, to follow through and succeed.”
According to Cornish, IFM also made a “significant contribution” to the due diligence process, acquisition strategy and the development of operational strategies. “The acquisition was jointly managed by IFM and MAG, working in a seamless way as one team. The market and operational improvement plans will lead to increased revenues and profits at Stansted over the next 10 years and beyond. ”
One of the biggest direct investors in the deal is AustralianSuper. Its stake in MAG now makes up 7.7 per cent of its total infrastructure portfolio. Jason Peasley, head of infrastructure at AustralianSuper, said one of the attractions of the deal was that it did not give them exposure to Stansted airport alone. “Stansted is not the risk profile of an asset that would sit well in our core infrastructure portfolio,” he says.
“The way it was executed through the MAG business and therefore getting exposure to a more diversified portfolio and having the strategic input of the management team during that bid phase I thought was hugely important both from competitiveness and riskmitigation points of view.” He was also happy with the price. “I understood that there was one other bidder that was close and that was disappointed to have lost out. That was a straight purchase by financial investors who did not have any of the strategic benefits of being part of a broader airport portfolio.
That gave us confidence in how [our bid] was priced.”
Ongoing, Christian Seymour, head of infrastructure Europe at IFM, and Manoj Mehta, executive director at IFM, are both now “constructive asset owners” at MAG, says Cornish, offering advice, guidance and direction using a balanced mix of constructive challenge and support. Seymour is based in London and has a background in acquisition, marketing, project development and operations management of energy and related infrastructure developments.
Mehta’s background is in private finance for public transport in London on projects such as the Thames Gateway Bridge and the East London Line Extension. As well as local advice, Cornish says IFM is “more than willing to share experiences” from its global portfolio. Money without a home Trust, long-term commitment, partnership and shared values are the hallmarks of the deal. “In my experience of managing joint ventures across the world, successful outcomes are delivered by good people committed to delivery, shared objectives and plans in an open and transparent way,” Cornish says.
“All the early business results coming out of the acquisition are encouraging and point to a successful long-term business.” Hanna is hopeful that the model will encourage more governments to sell infrastructure assets or to seek managers such as IFM as sources of capital for greenfield sites, but says there is still much work to be done. “There is a lot of money that cannot find a home. There is a shortage of opportunities. The Port Botany and Kembla purchases were the biggest deal in our history in Australia, but another one this year would be highly unlikely.”
IFM is currently in talks to act as partner of the UK attempt to create its own pension fund-led infrastructure manager, the Pensions Infrastructure Partnership (PIP), which is backed by 10 of the largest UK pension funds. Alan Rubenstein, chief executive of the Pension Protection Fund, one of the key players in PIP, is on record as using the same language as IFM by saying the fund is seeking partnerships that avoid the culture of short-term private equity-style performance fees and expensive highly leveraged transactions. It is looking to invest £4 billion ($6.8 billion).
The only drawback
If this all sounds a little too rosy, then Brett J Lazarides, an independent infrastructure advisor, gives a hypothesis of how specialists such as IFM and PIP might end up creating an uncompetitive pool of investors. He is a fan of the partnership approach, but says that if these bidder groups consolidate to the extent of reducing competition, it could create a situation similar to that previously faced by the infrastructure construction industry. This, he says, led to an inability to achieve a genuinely competitive critical mass among rival groups (for large greenfield tollways), leading to higher risk in how assets were structured and priced. However, he says this scenario is unlikely for IFM and MAG while there is a large number of pension fund investors operating independently in seeking infrastructure investments.
“One may be able to envisage in the future a material lessening of this independent competition through the continuing consolidation of pension funds or via groups such as the UK PIP and IFM, which could ultimately create a global oligopoly of mega-infrastructure partnerships that through sheer capital capacity and lowest cost of equity could ‘hoover up’ the globe’s premium stock of infrastructure.” “Between them, the owners of this portfolio and managers of the underlying assets could then have unprecedented power to control a suite of essential infrastructure, effectively highly influential over the underlying economies themselves.”