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Teachers' Flying Off Course?
Submitted by Leo Kolivakis, publisher of Pension Pulse:
The Globe and mail reports that Teachers lands British airport deal:
The
Ontario Teachers' Pension Plan stepped into the restructuring of the
British airport industry yesterday, increasing its stake in the
fastest-growing airfield in the U.K.
Teachers, which already
held a 14.5-per-cent stake in Bristol International Airport, bought the
35.5-per-cent stake held by Australia's Macquarie Airports for
$225-million. The airport, located about 200 kilometres west of London,
is the ninth busiest in Britain.
Ownership of the country's
airports have been in disarray since March, when Britain's competition
commissioner ordered the country's largest airport operator, BAA PLC,
to sell three of its seven properties. Meanwhile, Australian-based
Macquarie Airports has been unloading some of its holdings as it
reorganizes its portfolio.
While
Macquarie chief executive officer Kerrie Mather said the Bristol
airport had generated "excellent" returns, Teachers received a
12.7-per-cent discount from the airport's most recent valuation in June.
"Bristol
Airport was one of Macquarie's original investments and has generated
an excellent return over the period of our ownership," Ms. Mather said.
"With the portfolio having grown significantly over the last five
years, Bristol now represents just 4 per cent of our portfolio by
value, and we feel that our investors are better served deploying our
resources elsewhere."
Stephen Dowd, senior vice-president and
head of infrastructure investing at the $87.4-billion Teachers pension
fund, said Teachers is "an experienced investor in the sector," adding
that the asset would be added to the fund's $10-billion infrastructure
portfolio, which already includes interests in airports in Birmingham
and Sydney as well as holdings at ports, water treatment facilities and
toll roads.
As part of the deal, Teachers offloaded its 3.9-per-cent stake in Copenhagen Airports AS to Macquarie for about $120-million.
Airports
are seen as stable, inflation-proof investments because they
essentially operate as a monopoly in their communities. While airlines
desperately try to fill seats through the recession - the International
Air Transport Association forecasts its members will lose $11-billion
this year - airports earn fees for each plane that lands regardless of
the number of passengers aboard.
That's what has Canada's other
pension funds - including the Canada Pension Plan Investment Board and
the Ontario Municipal Employees Retirement System - watching with
interest BAA's appeal of the competition commissioner's ruling. Along
with Teachers, they are all thought to be interested in bidding on
Gatwick Airport, the second largest in London.
The losers may go
after the two other BAA airports that go on the auction block, since no
investor can own more than one of the three airports to be sold. BAA
also owns Heathrow and Stansted in London, and airports in Southampton,
Edinburgh, Glasgow and Aberdeen.
Infrastructure
is a hot asset class among Canadian pension funds. Unlike private
equity where you are thinking of an exit at the time of purchasing a
private company, infrastructure truly is a long-term investment that
offers stable inflation-sensitive returns.
But infrastructure deals are not always profitable. Just ask the Caisse who recently announced a $5.7 billion hit ,
of which private equity and infrastructure investments caused a
$1.3-billion hit, with most of that coming from its troubled investment
in British Airports Authority (BAA).
Moreover, as more investors pile into this asset class, there seems to be a bubble in developing in private infrastructure:
The
problem is that the chief benefit of the investment—a safe long-term
inflation-adjusted return—becomes harder to reach as more investors
pile into the market seeking it.
Experts worry that prices have
already been driven too high for many of the best assets. As evidence,
they note that more deals are being loaded up leveraged-buyout levels
of debt. At the same time, yield-hungry investors are increasingly
willing to build or buy infrastructure in riskier corners of the world.
And
it's not just private infrastructure that is getting bid up. According
to James Altucher, managing partner, Formula Capital, infrastructure
stocks is the next bubble of "mammoth proportions":
Brace
yourselves. Only a year after the housing and credit bubble officially
burst with the Lehman Brothers bankruptcy, a new "bubble of mammoth
proportions" is starting to grow, says James Altucher, managing
partner, Formula Capital.
Bubble 3.0 (Internet and housing being
bubbles 1.0 and 2.0, respectively), comes thanks to the stimulus bill.
"We have a trillion dollars coming. Only 10% of it's been spent.
Interest rates are near zero." Altucher's advice: follow the stimulus
dollars and invest in the infrastructure stocks that are rebuilding
America.
There are many risks in infrastructure
and once again what is the benchmark governing these private
infrastructure deals? I happen to think it should be a spread over the Macquarie Global Infrastructure Index Series (MGII):
The
Macquarie Global Infrastructure Index Series (MGII), calculated and
managed by FTSE, is designed to reflect the stock performance of
companies within the infrastructure industry, principally those engaged
in the management, ownership and or operation of infrastructure and
utility assets.
Are Teachers and other pension funds flying
off course? Only time will tell but they sure are putting lots of eggs
in the infrastructure basket. As with any investment, the benchmark
should reflect the beta, credit risk and liquidity risk of the
underlying investments. Infrastructure is a long-term asset class but
it isn't free of risks and the benchmark must reflect this.
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Anyone who buys anything from Macquarie needs their head checked. Ask the owners of MAP, MIG, BrisConnections etc etc how they feel.
Levering up the least liquid assets for the longest terms and charging a rising annuity stream of fees is their game....it is a con, it is blowing up in their face and it ignores 1 major theme. Deflation. It would seem the only people stupid enough to still be in the game are the public pensions.
As an aside, Macquarie must be the only bank in the world where the regulator is so f***ing complicit as to allow them to self-value listed, actively traded, reasonably liquid equities at 100 - 200 % premiums to their traded prices.
When we get credit crisis mk 2, this thing could be a short of Lehman-like proportions
The biggest factor in current investment is the alignment with government interests. While Ontario Teachers may think Britain is interested in its airports, we only know for sure that Britain is interested in Barclays, RBS, HBOS and maintaining the property bubble in general. The outrageous doubling of borrowing by Labor last month smacked the GBP hard, while its other 'risk on' traveling mates were running away. Can England even afford nine major airports?
I have a much higher regard for Ontario Teachers than Caisse. I think we can both imagine the frustration after the 40 million OT gave Railpower went for nothing, after Quebec and Ontario failed to support local infrastructure buildout. The arrogance of Quebec in this matter was especially surprising, seeing that jobs are leaving as fast as most young people can pack their bags to head west. In a way, I am not surprised, though not happy, that this is a gesture to pink shirt cowboy Harper to jump in the lake. Anywhere but Canada is what OT seems to be saying.
I am just an educator, but it seems to me that once you net all the noise out, there is one question and one answer.
Question: who is buying?
Answer: pension funds and wealthy families
The pensions are in a self-liquidation trap, within a global solvency crisis, so their administators, like everyone else in the Ponzi scheme are hoping their opponent, which has them in check, will self-destruct, if they can just string this thing out another day. That is rather obvious.
synthesis: are the wealthy families irrational enough to blow up the entire system, and are you ready if they do? In the past, they could always escape. Do they think they can escape their responsibility now?
What is an educator?
someone who teaches kids.
Yes, Wealthy families correlate a percentage of assets, pensions normally don't. Pension managers profit nicely.
Regarding you final paragraph--this investment is about as liquid as rock. And investing in the 9th busiest airport in the UK, given their economy and it's prospects, sounds like a stinker. Perhaps we need to develop an inverse fund to OTPP--might be a winner.
This is a very good investment, they are supplying flights for the West Country and South Wales. A huge region of England and Wales with populous, low house prices and thus money to spend on Costa Del Sol holidays!!!!!
So all negative commentators and Leo you're again wrong (how are you allowed on ZH???????)