One-way ticket

Institutional investors are still keen on airports. But not at any price

How much are you ready to pay not to miss your plane? Quite a lot, it seems. In a 2012 research paper, US-based Emily Rosenzweig and Thomas Gilovich showed that missed experiences tend to generate more regret than missed material purchases, implying that people are happy to pay disproportionately more not to be left out of something great. Judging by the price of last-minute taxi rides to capital airports, their conclusions apply particularly well to holidays and business travel.

Institutional investors seem to follow the same rule. At a time when few big airports are available for sale, many are checking in early to make sure they’ll be able to take part in auctions. The fear of missing out – such a prominent feature of our times that it’s now been given its own acronym (FOMO) – may indeed be the driving force behind unrelenting investor interest in the Lyon, Nice and London City Airport sale processes, which are expected to kick off in the coming months.

If recent deals are any indication, the mooted transactions could raise big money. The French government, which started its round of privatisations by divesting a 49.99 percent stake in Toulouse Airport to Chinese buyers in December last year, pocketed €308 million through this initial sale. The deal valued the hub at 18x EBITDA, according to sources. 

The same month, Australia’s IFM offered to take a 29.9 percent stake in Vienna Airport at a price of €82 per share, a 32.3 percent premium to the hub’s October share price. Earlier that autumn Macquarie and Ferrovial bought three UK airports for £1 billion (€1.4 billion; $1.6 billion). Nor are big-ticket deals limited to developed markets: the Brazilian government raised R$20.84 billion (€4.8 billion; $5.4 billion) through the privatisation of Galeão and Confins Airports at the end of 2013.

A number of factors explain why valuations have recently edged up. A slew of fresh, less experienced capital is scouting the infrastructure asset class. For the limited partners and investment firms looking to deploy this money, airports are a prime target. “A lot of institutional investors would really like to own airports. They’re very interesting assets,” a fund manager told us last week. Their enthusiasm sometimes translates into higher bids than caution would likely warrant, he reckons.

That’s because large discrepancies in valuations – and the propensity a potential buyer may have to overpay – are rooted in different views on capital cost and growth expectations. At a time when liquidity is rife and assets are scarce, some investors are ready to cut their required IRR so as to be more competitive during auctions. Economic momentum in the developing world and a budding recovery in the West has meanwhile pushed some to make optimistic assumptions about growth prospects. These dynamics have created room for investors to disagree about how much an airport is worth.

But both factors could soon play a smaller role. Required returns will likely evolve in tandem with interest rates, which in the short to medium term are bound to rise across most OECD markets. Mature economies will continue to slowly recover – but they will probably cruise at a measured speed, just as emerging markets seem to be entering a prolonged phase of subdued growth. That will leave less room for forecasters to argue, meaning valuations will evolve within a narrower band.

Some investors believe it is already the case. “With privatisation processes involving many different bidders from different jurisdictions and backgrounds, you may still get more dispersion in valuation. But at the sophisticated end of the market you’ll find a lot of convergence,” an experienced dealmaker recently told us. 

So opinions may still diverge markedly in the short run, especially when it comes to unusual assets and processes. An example of this is the portfolio of airports currently being privatised in Greece. But with institutional investors increasingly willing to stay grounded, the window for valuations to significantly take off is probably narrow.