Splash out on an illiquid asset and get some real returns…

Last year I talked about a potential opportunity for UK pension funds to buy Cambridge Water  on an unleveraged basis in order to secure, long-dated inflation-linked cash flows, with a real return significantly above that provided by long-dated inflation-linked gilts. The idea being that as financial markets and economies continue to deleverage, UK pension schemes have the potential to fund the full spectrum of UK infrastructure needs – both in social infrastructure; for example care, education, health and housing, as well as economic infrastructure such as roads, railways, ports, and utilities. The idea has even now found favour with our politicians! Two of our clients saw the opportunity to partner with Cambridge Water, providing long-term capital in return for these long-dated secure inflation linked cash flows, and mandated Redington to approach HSBC. Subsequently we therefore put in an unleveraged bid for the asset. Unfortunately in October Cambridge Water was sold to South Staffordshire Water which is owned by Alinda Capital Partners, the world’s largest independent infrastructure firm. Since then, however, Redington has received a flood of enquiries asking about the Cambridge Water deal and the rationale for its investment profile i.e. combination of inflation linked cash flows with an attractive real return.

Good news for the New Year!  Veolia Group has just announced that it is in the process of appointing advisors and banks for the sale of its three UK water assets.

Veolia Water UK Plc is the holding company for three separate water companies, serving 3.5million customers:

  1. Veolia Water Central, previously Three Valleys Water and by far the largest of the three companies,
  2. Veolia Water East, previously Tendring Hundred Water Services,
  3. Veolia Water Southeast, previously Folkestone and Dover Water Services.

Veolia Environnement SA is the ultimate parent company and has owned the three water companies since 1987. Following a number of profit warnings and a ratings downgrade the Veolia Group is in the process of selling a number of assets in order to reduce its net debt.

Based on prices achieved in recent sales of water companies, e.g. Northumbria Water, Bristol Water and Cambridge Water, the likely sales price will be between 125% and 130% of the regulated asset value equating to an enterprise value of £1.15 – £1.2billion for the combined group. This would likely consist of an equity investment of c.£500m and debt requirement of c.£700m (£500m excluding existing bonds).

For interested Pension Funds there is therefore a window of opportunity to approach Veolia Environnement to discuss the purchase of the individual water companies or to form a consortium to bid for “Central” or even the combined group. The two smaller companies, “East” and “South East” would provide an attractive opportunity for a pension fund to make a 100% acquisition of a UK water only company for an enterprise value of £80-90million i.e. similar in size to the Cambridge Water deal. Note: a pension fund investor will benefit significantly from the growth in regulated asset value, both from additional capex spend and RPI indexation. This is a major driver in long term value of regulated water companies. Veolia Environnement is expected to launch a formal sale process during January and the process is likely to be a two or three stage process lasting 8-10 weeks with access to vendor due diligence reports.

Hopefully Santa has answered my wish list for 2012 by providing pensions funds some (three-in-one) opportunities to act on.

Good Governance = Ability to ACT

These are tough times for pension schemes, with market moves impacting both the asset and liability side of their balance sheets.  Should trustees rebalance their equity holdings as the market drops, use this opportunity to reallocate assets to alternative classes or remain on hold and wait for the turbulence to subside?

Without a plan, making these decisions in the depths of a crisis can often do more harm than good.  I believe Good Governance involves three key concepts, which combine to allow trustees to take appropriate decisions even in the heat of adverse market moves:

Good Governance = Ability to ACT, where:

  • A = AGILITY to make and implement decisions
  • C = CONTROL, provided by a robust pension risk framework
  • T = TRANSPARENCY on both assets and liabilities
  • Agility allows decision-makers to act swiftly whenever the need arises.  Pension schemes, as long term investors, need to be nimble when  attractive long term opportunities arise – this may involve adding to risk, reducing risk or re-allocating risk in a short space of time.  Before making any decision, trustees must ensure they are in Control…
  • Control comes from setting a robust framework to monitor and manage a pension scheme’s risk.  Ideally this framework would be in place BEFORE any market turbulence. At Redington, we help our clients put together a Pension Risk Management Framework (PRMF), within which agile decisions can be made.  To be in control, you need Transparency…
  • Transparency is required on both assets and liabilities to allow an up-to-date funding level to be reported.  On the liability side, this involves accurate actuarial analysis around future payments to retirees.  On the asset side, it involves regular and timely updates on pricing of investments.  Transparency is particularly important during times of market stress.

NAPF Investment Council – I am standing for election and would love your support

As a member of the NAPF investment council, I will endeavour to make a valuable contribution to getting better outcomes for both defined benefit and defined contribution members.

I have spent the last 8 years developing, creating and implementing investment solutions to meet the ever changing regulatory, governance, and (financial) market conditions. In 2003 I was involved with the first derivative LDI transaction with Friends Provident whilst working at Merrill Lynch which remains one of my career’s most valued achievements. In 2006, I followed my passion and setup up Redington, alongside my business partner, aspiring to become a well respected and progressive investment consultancy. Whilst at Redington I have worked with both small and large clients and gained an invaluable insight into the multi faceted challenges (especially investment) facing the pension industry today.

I am passionate about fostering solutions such as investing in social housing and un-leveraged UK infrastructure assets to source long-dated inflation linked cash flows.  I believe the NAPF council is the right forum for discussing the utilisation of such solutions, and think my experiences will bring forth a unique, yet collaborative perspective of many trustees and corporate clients whom I have been fortunate to work with.

RedMaze – can you run the risk?

Help get your scheme to full funding on your daily commute in RedMaze.

The game injects a bit of entertainment to your daily travels and adds a little light relief to the pensions situation.

In a brand new twist of an arcade classic, navigate your way through the mazes, collect all the contributions and avoid the “Risk Raiders”.

  • Can you run the risk of equity bears, inflation, longevity and interest rate doves?;
  • It’s not always doom and gloom – tides can turn and conditions can change in your favour;
  • Collect special contributions and turn the equity bear into an equity bull, morph the interest rate dove into an interest rate hawk, nullify inflation and say goodbye to grandpa Joe…

 It’s easy to get lost in the pensions maze…but that’s why it’s important to know your goals, understand your risks, plan a strategy and have a robust framework. 

Get in touch to find out more.

Available now for the iPhone. Free to download on the App Store: