Earlier this week, we were reminded once again that Heathrow Airport Holdings (Heathrow) has a lot of fans among the ranks of institutional investors and sovereign wealth funds.
On this occasion, it was Universities Superannuation Scheme (USS) – the UK’s second-largest pension fund – agreeing to pay Spanish infrastructure giant Ferrovial £392 million (€460 million; $636 million) for an 8.65 percent stake.
As it takes its seat, USS will look around and find it has plenty of fellow travellers. Also on the shareholder roster are: Canadian pension La Caisse; Singapore’s GIC; Qatar Holdings; and the China Investment Corporation (as well as US fund manager Alinda Capital Partners).
But will Heathrow’s shareholders be in for a smooth flight or a bumpy ride? In a statement announcing the stake purchase, USS head of private markets Michael Powell himself referred to the “very challenging” Q6 regulatory proposals put forward by the UK’s aviation regulator, the Civil Aviation Authority (CAA).
To distil those proposals down to what is perhaps the key point for Heathrow, it failed to persuade the CAA of the need to charge airlines what the Financial Times described as an “inflation-busting” rise in user fees over the next five years. Heathrow claimed that, as a result, its shareholders had been badly served and may not now be willing to invest in a third runway.
If it’s true that investment in Heathrow will dry up as a result of the proposal (and opinions on this differ), it could have a significant impact on Heathrow’s future prosperity at a time when other airports around London are gearing up to challenge its dominance (and making their case for expansion to the government-initiated Davies Commission, which is exploring the issue of airport capacity in the south-east of England).
This is a reminder that airports – while their return potential is normally considered higher than that for core infrastructure assets – face a challenging double whammy of market risk and regulatory risk. And this reminder prompts a question: Why has Ferrovial had such success in selling stakes to institutional and sovereign wealth investors (as, incidentally, have other UK airports such as Gatwick and Stansted)?
After all, these investors are generally considered to be seeking investments of the distinctly unadventurous, safe and stable type – not a description easily applied to airports.
One answer to that question may be found when you challenge the assumption that targeting core infrastructure is the most sensible strategy. In today’s market, where competition for core assets is fierce and returns are being driven down, that assumption is highly questionable. Diversifying across the risk/return spectrum seems a wise move in the circumstances – even for those instinctively inclined to play it safe.
A second answer is provided by the pragmatism that comes with being a long-term investor. Yes, the regulator will periodically present challenges (as it will next year in the UK water sector, for instance), but – given enough time – the favourable and unfavourable rulings will more or less balance themselves out.
This at least is the hope reflected in the words of Powell, when he said: “USS is investing for the long term. We have confidence that the right incentives will be set in place to encourage the investment that Heathrow and the UK needs.”