KKR and Skip Infrastructure Fund acquire 75% stake in Queensland Airports; billionaires take control
CAPA - Centre for Aviation anticipated an explosion of M&A activity arising out of the sale of Sydney airport a couple of years ago, both in Australia and internationally.
That didn't happen for a variety of reasons, but in the last 12 months since late 2023 there has been some movement in on-sales of lease equity in Australia (not new sales, because all the airports that matter there have long been privatised).
It has culminated in a transaction at the end of Sep-2024 that resulted in three of the four shareholders in Queensland Airports Ltd (QAL) - which has four facilities in northeastern Australia, including the principal one at Gold Coast - selling their combined 75% share to an (unnamed) consortium of the US private equity firm KKR and the Australian tech financier Skip Capital, which KKR needs on board to satisfy local ownership regulations.
It is KKR's first acquisition in this sector, although it has occasionally tried in the past.
A big driver on the sell side is the overexposure of many of Australia's funds to airports, with some investors committed to several funds putting their money into the same assets; this coupled with nervousness about the failure of the air transport market to get back to pre-COVID levels, as it has been able to do so elsewhere.
That hasn't stopped KKR leaping in blindly, its hand held perhaps by the Skip CEO, who has deal-making experience - at least with airports, though that isn't the same as running them.
It is a strange and surely unforeseen outcome of the privatisation exercise that began in 1997 that a clutch of four small airports, most of them remote, and which together host fewer than 10mppa, should now be owned by two billionaire families and a US private equity firm.
However, it is all part of a sea change in the sector, which is likely to see further activity; also in the northeast of the country, and also out west in Perth, where the action has now shifted.
- The Australian airports private sector investment arena suddenly springs back into life.
- A deal is concluded on Queensland Airports – KKR and Skip Capital will take 75% of the equity from The Infrastructure Fund.
- Foreign attraction to Australian airports has increased: KKR has had no previous airport investment anywhere in its almost 50-year history.
- But collectively, the four airports do not amount to much, and many investors got cold feet along the way.
- KKR has teamed up with Skip Capital, ostensibly to satisfy local ownership rules, but the latter’s CEO does at least have some deal-making experience in the sector.
- Overexposure to the airports sector among the many Australian infrastructure and pension funds is a big motivator behind their current backtracking.
- But there’s no airport asset overkill where KKR and Skip are concerned.
- The new owners are a couple of billionaire families and a foreign private equity firm – is that what was envisaged when the privatisation process began?
- New aviation services agreements and master plans will be a boon to the new lease-holders.
- Up next are probably Cairns, Mackay and Perth airports; there has already been some movement at the latter.
- The market is resurrected, but not as we know it.
The times are a-changing in the Australian funds investment arena
During the past year or so CAPA - Centre for Aviation has reported on the changing airport ownership scenario in Australia, the country where - more than in any other - superannuation (pension) funds have held sway over the airport concession programmes. There has been some recent evidence, though, that they have been considering alternative sectors in which to invest, in a country where, for example, tourism arrivals so far in 2024 are still running at only 90% of pre-pandemic figures.
That is but one of several factors influencing investment decisions currently.
Meanwhile, some of those funds have been converging, and portfolios are being rebalanced.
Australian ownership of those airport leases looks set to diminish. This seems to have generated a knock-on effect impacting other, non-superannuation, funds.
The Infrastructure Fund decided to offload its QAL holding almost a year ago
In Nov-2023 the CAPA - Centre for Aviation report 'Australia: Queensland Airports sale will attract local and international interest' focused on The Infrastructure Fund (TIF), and the fact it had upped its proposed disposal of Queensland Airport Ltd (QAL) shares to 40%; and that with minor shareholders' offloads included, that racked up 74.25% of the equity.
The remaining equity is owned by the late Perth billionaire Stan Perron's Perron Investments, which waived its pre-emption rights earlier in the auction.
(TIF was established in 1998 with a single asset [the Gold Coast Airport, which remained its main one in the sector] and progressively grew into a diversified portfolio of investments spanning many different sectors spread across Australia, the UK, and the United States).
The previous year, 1997, was a seminal year in the airport sector as it marked the start of the disposal by the Federal Aviation Corporation (FAC) of most of the leading airports by long term leases. In fact, it is arguably the case that the FAC's actions, which began in the early 1990s, primed the rush towards privatisation in many other parts of the world.
Foreign attraction to Australian airports has increased
That sale indication by TIF, coming on top of mooted sales at Perth and Brisbane airports, had already sparked interest abroad in a reversal of the typical situation that has held for the past couple of decades: one in which Australian investors, including some of those funds, have been frequent investors in airports elsewhere. Especially so in Europe, and with occasional forays into the United States via consortium bids for the few lease deals that have come up there.
So, fired up by potential sales at Perth and Brisbane airports as well, interest in QAL was anticipated from Australian and international entities alike, and firms such as Kohlberg Kravis Roberts (KKR), the leading global and US-based investment firm, have already been attracted, even when the available equity was less than 40%.
KKR teams up with a much smaller Australian investor to circumvent ownership rules
At that time (Nov-2023), KKR was joined by Skip Capital to form a consortium bid to fight off others from Global Infrastructure Partners and Dexus Group; and possibly Palisade Investments.
Skip Capital is a private fund based in Australia - investing in technology and infrastructure - and its inclusion in the bid enabled KKR to satisfy the Australian Airports Act requirement - which dictates that airports be at least 51% owned by an Australian entity.
More like Sydney Airport, and demanding a control premium
Potential suitors were already being informed that the QAL group is more like Sydney Airport and Hobart Airport than, for example, the dual-listed (meaning companies listed on multiple exchanges when those exchanges differ widely in terms of region or requirements) Auckland International Airport in New Zealand. In that it should fetch a control premium (an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company), and to which is added a stronger growth profile and available capacity.
Deal completed in late Sep-2024 by what CAPA considered a 'guarded private equity group'
On 26-Sep-2024 TIF announced an agreement for the sale of its combined 74.25% interest in QAL to a consortium comprising KKR and the Skip Essential Infrastructure Fund. The deal was valued at around AUD3 billion for the 99-year leases, among the longest in the business - anywhere.
KKR is making the investment from its Asia Pacific Infrastructure Investors II Fund. This follows KKR's announcement in Jun-2024 at the 'Indo-Pacific Partnership for Prosperity' of its intention to mobilise infrastructure in the Indo-Pacific region, and it marks KKR's latest infrastructure investment in the ANZ region.
Past investments in ANZ infrastructure have included: Spark Infrastructure, which owns high-quality, regulated electricity networks across Australia; and Ritchies Transport, a leading transportation operator in New Zealand.
While ANZ is clearly a focus region for KKR, it did once - together with the Carlyle Group, Goldman Sachs, Morgan Stanley, Credit Suisse and others (all of which are or have been directly involved in the airport sector) - amass an estimated USD250 billion war chest to finance a wave of infrastructure projects in the United States and overseas.
At the time, over a decade ago, CAPA - Centre for Aviation registered KKR as "potentially on the fringe of investing into airports and the wider aviation business", while identifying it as a "guarded US-based private equity investment group".
It has finally let that guard drop.
The majority and minority investors exiting QAL, all at once, are:
- Macquarie Asset Management (MAM): part of Macquarie Group, and the (claimed) world's largest infrastructure manager with AUD938 billion in assets. MAM is the TIF's manager since it parted company with Hastings Fund Management in 2017;
- State Super: the Trustee of the State Authorities Superannuation Scheme (SASS) with AUD37 billion of assets;
- Australian Retirement Trust (ART): one of the largest superannuation funds in the country, and one that oversees AUD300 billion of retirement savings.
An immensely powerful trio takes back seat, while new owners have little hands-on airport experience between them
Whichever way you look at it, that is an immensely financially powerful trio of investors to be moving on from an airport group that totalled just a little over eight million in passengers in 2023, with the busiest one (Gold Coast) reaching the giddy heights of 6.2 million passengers while the least busy (Longreach) struggled to make 40,000.
Those four airports were marketed with guidance for AUD140 million in earnings this financial year, and the sell-side 'pitch' is understood to have talked up the portfolio's strong recovery from COVID-19's lockdowns, which were severe in Australia.
Active airports for Queensland Airports Limited (QAL)
Many airport owners throughout the world would give their right arm to attract investment gravitas of that order, irrespective of what KKR Infrastructure can bring to the party (USD78 billion assets under management and zero experience of the Australian airport marketplace, and with only two previous declarations of interest in the sector known to CAPA - Centre for Aviation - for AENA [2014] and Athens Airport [2019 -2023] - neither being successful).
Skip Capital, meanwhile, is a comparatively minor league player. It has approximately AUD1 billion in assets under management, describing itself as "passionate about technology and innovation", and with a vast array of investments - predominantly in start-ups in tech companies, but also in, inter alia, in healthcare and gym equipment.
It would be uncharitable to say Skip Capital is in this consortium to make up the numbers, but its role as a regulation facilitator is clearly its principal raison d'être.
So neither of the two investors taking over the reins at QAL has any airport management between them - although Skip Capital's (Ms) Kim Jackson is a former Hastings dealmaker, and is at least acquainted with the sector - and potential spending power has been significantly reduced to boot.
(Ms Jackson is the wife of Scott Farquhar, the billionaire owner of the US-Australian tech company Atlassian).
Overexposure to the airports sector is a big motivator behind the backtracking of the funds
This raises pressing questions as to why the previous investors chose to move on now, short of being made an offer they couldn't refuse.
Is the reason tied to the number of redemption requests (a written request by a shareholder to have all or part of its shares redeemed by the company) being levied on TIF by MAM, ART and others late last year? Which is tied directly to TIF's over-exposure to airports when its investors are also committed to the sector via other investments in other funds? (And which might be labelled 'airport overkill').
And all this is compounded, as mentioned earlier, by the tendency towards the consolidation of the funds.
There's no airport asset overkill where KKR and Skip are concerned
Indeed, if that is the case, then it might be argued that the KKR/Skip combination might be beneficial to QAL. Neither has airport assets, in Australia or anywhere else - at least not to a substantial level in KKR's case - and both therefore start with a clean sheet. There is no opportunity for 'overkill'.
A dog fight suddenly petered out
KKR and Skip didn't have it all their own way and there were some internal ructions too, in a transaction which became protracted and might even have collapsed altogether.
Early interest was shown by Stonepeak Partners, VINCI, and Global Infrastructure Partners, all of which abandoned their bids, while Dexus (previously AMP Capital) lost its bid partner.
KKR and Skip came close to walking away from the deal early in Sep-2024, after the former experienced "doubts" about it.
Ultimately, bids were submitted by KKR/Skip; the country's largest superannuation fund AustralianSuper (in conjunction with the Gold Coast Council), and Dexus.
The inclusion of a municipal authority in a successful PPP bid would have been a rare thing indeed. Unlike, say, France, Germany and Italy, airport ownership transactions in Australia have been devoid of them from the outset, one notable exception being Brisbane City Council which retained a 10% stake in its airport in Jul-1997.
AustralianSuper certainly had greater clout as a potential operator, by way of its 7.5% equity in Sydney Airport, while Dexus, via its acquisition of AMP Capital's Australian assets, has stakes in Melbourne, Launceston and Perth's Jandakot (general aviation) airports.
The new owners - a couple of billionaire families and a foreign private equity firm
As things stand, though, the deal puts QAL's ownership under two billionaire families (Jackson/Farquhar and Perron) and KKR - a foreign private equity investment fund that has never previously invested in an airport in its 48-year history.
It has to be wondered whether that is quite what the FAC had in mind when it started debating the Australian airport lease process over 30 years ago.
New aviation services agreements will be a boon
Among the variety of positive and negative future indicators for this small group of airports, mostly in remotely populated areas and without substantial incoming tourist potential, is the fact that new aviation services agreements have recently been signed with Qantas and Virgin Australia.
New connections are planned by Qantas to Hamilton and Dunedin, making the Gold Coast Airport Australia's most connected airport to New Zealand.
Between them, those two airlines, together with Qantas' wholly owned LCC subsidiary Jetstar, account for 96.8% of the seat capacity at the main Gold Coast airport and 96.7% of the movements, the remainder in each case being taken by Air New Zealand.
Gold Coast Airport: system two-way seats for all business models, week commencing 07-Oct-2024
While too great a focus on a small number of airlines can be a bad thing, taking over an airport immediately after such deals have been concluded is firmly in positive territory. No-one (and there are plenty of Americans involved in this analogy) wants to be a football team just as the players' contracts are running out.
'Master Plans' in place, or soon to be
Gold Coast Airport is also pushing ahead with a five-year 'Master Plan' that is expected to reveal new developments on its campus, while the Townsville Airport Master Plan is already approved.
Over the past five years, at Gold Coast Airport more than AUD500 million has been invested in expansion and improvement initiatives, including the southern terminal expansion in 2022, to double its footprint, and the addition of retail outlets, six new gates, new border control facilities, and four aerobridges. It is Australia's sixth busiest airport.
The Gold Coast Airport Master Plan will see the addition of a retail village, health and wellness hub, and conference and tech centres.
Townsville Airport has benefitted from shareholder investments in the airport's entryway and terminal redevelopment.
Up next - Cairns, Mackay and Perth?
Following on, belatedly, from the Sydney Airport deal in 2022 - which resulted in that airport being delisted and placed in the hands of Australian and foreign investors led by IFM (which hasn't been mentioned so far in this report) - this partial QAL stake trade may turn out to be the first of a string of airport sell-downs.
Likely to be next on the list is North Queensland Airports - the owner of Cairns and Mackay airports, and where Macquarie Capital has already started testing buyer appetite.
The redemption-hit TIF and a JPMorgan fund are regarded as potential sellers.
If both investors agree to offload their stakes, it would mean that 93% of the Cairns and Mackay airports would be up for grabs. Between them they handled just shy of 5.5 million passengers in 2013, making them fringe candidates again for the entities that bowed out of the QAL deal, like VINCI, GIP, and Dexus.
Also on dealmakers' hit lists is likely to be the (main) Perth Airport - where New Zealand's Morrison & Co, which manages a 15% stake on behalf of Utilities Trust, is considering putting that stake on the block.
Of the six institutional investors at Perth, three are superannuation funds and TIF is another.
In the immediate aftermath of the QAL deal, AustralianSuper moved quickly to increase its ownership in Perth Airport, exercising its pre-emption rights to acquire a slice of Utilities Trust of Australia's 47% stake.
A fan of unlisted airports, it has been invited to up its stake previously, but had declined.
In doing so now, AustralianSuper will pay a multiple of about 20-times to 22-times Perth Airport's earnings to acquire the Utilities Trust stake, which is some 10% cheaper than the 24-times fetched by Queensland Airport in the earlier sale (but is still above an industry average, that fell to around 17-18 times during the COVID-19 pandemic).
The market is resurrected, but not as we know it
After a long hiatus the Australian airport market is stirring back into life, but FAC couldn't have foreseen this convoluted state of affairs - one in which sedate secure pension funds are exiting the airport sector and the longevity of investment they crave, to be replaced by individual billionaires. Billionaires who would likely not have the love for their investments, seeing them merely as another notch on the belt of acquisitions, irrespective of any fine words they may utter now.