A matter of trust

“Better investment decisions for better investment outcomes,” boasts UK-based asset manager Henderson Group in big bold letters on its website. But a group of investors in one of its infrastructure funds is begging to differ with its self-analysis.

At press time, about 30 limited partners (LPs) in Henderson’s second infrastructure fund – Henderson PFI Secondary Fund II (Fund II) – were threatening to take the asset manager to court if it failed to present them with a compensation plan by September 30, after Fund II lost 60 percent of its value.

Henderson raised its second infrastructure fund in 2006 with £574 million (€689 million; $885 million), about 90 percent of which is said to have come from the pension funds that are now threatening litigation.

It managed to raise that sum, LPs claim, on the back of promises that it would use the money to invest in low-risk, steady-income projects that form part of the UK’s private finance initiative (PFI), Britain’s standardised procurement process for public-private partnerships (PPPs).

Instead, Henderson invested all the capital in the acquisition of John Laing, a UK developer with a portfolio of over 50 PFI projects, for £1 billion. This exposed Fund II and its LPs to John Laing’s pension deficit and, following the financial crisis, to low forecasts for PFI projects in 2009 and 2010 and capital constraints on John Laing’s side.

As a result, Fund II was worth only £229 million as at March 31 2010, leaving Henderson with a roomful of mutinying LPs just four years into the 10-year life of the fund.

On the face of it, Henderson appears to have seen John Laing as a good opportunity to gain exposure to a diversified portfolio of PFI/PPP projects, something a source close to Henderson confirmed. While most of John Laing’s portfolio is located in the UK, it also holds assets in continental Europe, Australia, Canada and the US across social infrastructure, rail, defence and healthcare, to name just some of the sectors the developer is invested in.

But buying a company is quite different from buying stakes in a number of projects – as the pension deficit that consumed part of Fund II attests to. Was Henderson not aware of the deficit when it decided to buy the developer?

It was, argues the source, and it had a plan to deal with it that included selling the developer’s non-PFI assets. However, the financial crisis threw this plan into disarray by not only widening the deficit, but also dampening prospects for the sale of these non-core assets, the source explained.

As questionable as Henderson’s decision may have been, why did the fund’s LPs not protest back in 2006? One of the possible answers to this is that they didn’t know what Henderson was doing.

“What pension funds would have agreed to invest in another pension fund? If they had told investors that they would have ended up with a pension fund, none would have said yes,” an anonymous source complained to Reuters.

But the bidding for John Laing was a relatively high-profile process that lasted for several months and which involved considerable fencing between Henderson and insurance company Allianz. As far as the source close to Henderson is concerned (a view somewhat corroborated by other sources quoted in the media), LPs did not raise objections during the three-month bidding period back in 2006.

All of which is somewhat overshadowed by the damage that has already been done to the image of the blue-chip asset manager, which oversaw some £56 billion in assets at the end of June.

Regardless of a potential court case and its outcome (which some suggest would turn out well for Henderson due to contractual fine print), losing the confidence of your LPs is perhaps a GP’s worse nightmare and a sure way to compromise further fundraisings.  

This leaves Henderson with six years to turn around Fund II and deliver the sort of healthy returns that could be its only way out of the current predicament.