OTPP to sell its airports – a brief opportunity in a turbulent world, or is there more to it?

OTPP will sell long-held stakes in European airports - no half-measures

Canada's Ontario Teachers' Pension Plan (OTPP) has reported its intention to sell its long-held stakes in major airports in Europe, including Brussels Airport, Copenhagen Kastrup Airport, Birmingham Airport, Bristol Airport and London City Airport. OTPP holds stakes ranging from 25% to 70% in each airport.

The airports are estimated to have a combined value in excess of GBP10 billion.

OTPP has a combined share portfolio valued at approximately GBP3.5 billion.

Multiple Canadian pension funds have invested in European airports

One of Canada's - and the world's - largest institutional investors, OTPP reported having CAD249.8 billion in net assets as of Jun-2023. It has recorded an average annual return of 9.4% since inception in 1990.

It acts as a partner organisation of the World Economic Forum. Its investments in other sectors have included Camelot, the organiser of the UK National Lottery until Jan-2024, and the Irish national lottery.

OTTP is one of six Canadian pension funds that are known have invested in the airport sector globally, or to have attempted to. Together with Australia (where they are numerically superior), the Canadian funds are the most active globally in airport investment and they have the greatest scope.

That said, it is Europe that has been a happy hunting ground for them, with the majority of their assets located there and OTPP has been the one most focused on the European continent, and for many years.

OTPP is the largest single-profession pension fund in Canada and - jointly with PSP Investments, which bought Hochtief AirPort (now known as AviAlliance) in 2013 - has been the most active in the airports sector, with longstanding investments.

(OTTP and PSP are two of Canada's famed 'Maple 8' funds, which collectively manage about CAD2 trillion in taxpayer-backed pension schemes for teachers, municipal employees and healthcare workers. The Maple 8, created after a series of reforms to tackle underfunding in the 1990s, have become well known for investing in infrastructure schemes across the globe, including in the UK).

As with all pension funds, OTPP invests with a long term focus, which is applicable to the airport sector and its increasingly diversifying revenue streams.

Active airports for Ontario Teachers' Pension Plan (OTPP)

Source: CAPA - Centre for Aviation.

Macquarie has been a frequent partner

OTPP's European investments date back 25 years, and frequently its investments have been in conjunction with Australia's Macquarie Group; also with the Macquarie Airports subsidiary, which no longer exists. Numerous swap deals have been discussed over the years.

The current holdings are listed below.

Bristol Airport, UK

Bristol Airport ownership, as at 02-Dec-2024

Source: CAPA - Centre for Aviation.

London City Airport, UK

London City Airport was acquired in 2016 by a consortium comprising Alberta Management Investment Corporation (AIMCo) as the lead; OMERS, another Canadian pension fund; OTPP; and Wren House Infrastructure Management (Kuwait Investment Authority, the Sovereign Wealth Fund).

The precise ownership details are not revealed.

Birmingham Airport, UK

Birmingham Airport ownership, as at 02-Dec-2024

(Dark Blue = Metropolitan boroughs of the West Midlands; Red = OTPP; Grey = New South Wales Treasury Corporation and Sunsuper Superannuation Fund; Light Blue = AESOP Birmingham Airport Staff Trust.)

Source: CAPA - Centre for Aviation.

Brussels Airport, Belgium

Brussels' Airport ownership is convoluted.

The Brussels Airport Company NV/SA is the operator.

Brussels Airport Company has two direct shareholders: the BAISA consortium and the Belgian federal government through the Federal Holding and Investment Company (FPIM/SFPI). BAISA owns 75% of the shares, FPIM/SFPI 25%.

The BAISA consortium consists of OTTP, the Dutch pension fund APG, the Australian investor QIC, the Swiss investor Swiss Life, the financial markets partner of the New South Wales public sector in Australia, TCorp, and the Japanese Government Pension Investment Fund (GPIF).

Copenhagen Airports, Denmark

Copenhagen ApS' (CAD) ownership, which includes Roskilde Airport as well as the main Kastrup facility, is even more convoluted.

CAD is jointly controlled by OTPP and Denmark's 'Arbejdsmarkedets Tillægspension' (ATP); Macquarie's MEIF3 and Tivoli Holdings having sold their equity to the Danish Pension Fund.

The Danish state declined its option to reduce its ownership share. Kastrup Airports Parent ApS is the indirect controlling shareholder of Copenhagen Airports A/S, with a 59.4% stake. Kastrup Airports' Parent ApS comprises ATP, OTPP and Elevenmoront Corp, which acts in concert with OTPP.

Copenhagen Kastrup Airport ownership, as at 02-Dec-2024

Source: CAPA - Centre for Aviation.

Intense activity in 2013/14, but latterly a lack of action

Some of the transactions came during an intense period of activity in 2014, when 100% of Bristol Airport was secured (subsequently falling to 70%), while the share in the equity in Birmingham Airport was increased to almost 50%.

OTPP has been active elsewhere for as long as records have been held by CAPA - Centre for Aviation, starting in 2013 with the second attempt to lease out Chicago Midway, a tender that was withdrawn before its conclusion.

Subsequent bids, or EoIs (Expressions of Interest), included those for Nice Airport in France - the country's third busiest and probably the most attractive of the French airport concessions to date - and the St Louis Lambert lease in the USA in 2019, another late withdrawal by the city.

In that instance, OTPP's response to the RfQ was jointly with Copenhagen Airports, presumably for its operational experience.

So there have been few attempts to expand its portfolio in the past decade but those that were have been well identified; separating the wheat from the chaff.

On the other hand, OTPP has previously let it be known that it was seeking to divest its stakes in some of the airports.

In early 2017 it was the Birmingham and Bristol airports that potentially came under the hammer, while OTPP made it clear that it would maintain its stake in London City Airport. Shortly afterwards OTPP declared its interest in Macquarie's proposal to reduce its stake at Brussels.

Then, in Jan-2018, OTPP sold part of its interest in Birmingham and Bristol Airports to two Australian pension funds - New South Wales Treasury Corporation and Sunsuper Superannuation Fund.

At that stage OTPP remained an investor in all six airports. There had been no full-blown disposals, merely tinkering with the equity in each case, as indicated in the individual airport ownership profiles above.

It seems evident now, though, that the attachment to the airport sector is beginning to wane.

Even allowing for the COVID-19 pandemic, the Ukraine War, Middle East conflict and the dearth of M&A activity, OTPP's name has not been linked to any such activity in the past five years.

What is behind this decision? The airports have performed adequately in the circumstances

So why this decision now?

On the face of it, it is unlikely that poor performance at any of the individual airports is the cause. Most of them have been invested in by OTPP for a long time, and have ridden numerous storms.

The single exception is London City, previously a staunch performer, but which has taken time to recover from the COVID-19 pandemic - it is now adversely impacted, inter alia, by a new high-speed rail line, taking high-value passengers living and/or working in its vicinity directly to London Heathrow Airport. Its future has looked more promising in the past than it does now.

The table below shows how passenger traffic at OTPP's invested airports has grown in the decade from 2014 to 2023 again allowing specifically for the declines experienced especially in 2020 and 2021.

Airport	Percentage growth in passengers, 2014-2023
Birmingham, UK	+18.2%
Bristol, UK	+56.3%
London City, UK	(-7.3%)
Brussels, Belgium	(-1.2%)
Copenhagen Kastrup	+4%
Average	+14%

NB: Copenhagen Roskilde Airport is omitted because it is primarily a short runway, general aviation and business jet facility.
Source: CAPA - Centre for Aviation Airport Profiles.

That overall 14% increase is par for the course in Western Europe, while there is one star performer at Bristol.

Nor is there any known overcommitment to infrastructure investments at any of the airports that can no longer be justified.

There may be no better time to sell than now, and other regions are begging for investment…

The only realistic scenario for OTPP is that airport sale opportunities won't get any better than they are now - on the crest of a recovery, but with who knows what Black Swans lying in wait.

OTPP is involved with asset investment in a range of sectors across the commercial spectrum, and in many parts of the world. It may simply have decided that regions such as Asia Pacific and the Americas offer better opportunities in the airports sector.

It would not be the first, or the last, to switch its focus away from Europe.

GIP/BlackRock, to give just one example, is an organisation that seems to be doing that right now, with a shift in emphasis towards both of those regions and away from Europe.

And OTPP could benefit from changes in airport investment opportunities that may now arise in the US under the new administration. In that case, one might expect announcements to be made quite soon by OTPP about targets in those regions.

…as are other sectors

Or the reason might be that the main chance lies in renewable energies, where investment levels are outstripping airports, reaching USD600 billion on renewables and USD1.6 trillion in clean energy overall in 2022. And the air transport business will always carry some baggage where the environment is concerned.

OTPP is a major investor in that sector already.

Canadian market being prepared to open up to domestic investments by the funds

Another reason for the decision may be opportunities that may be about to arise in Canada itself.

A previous CAPA - Centre for Aviation report, published in May-2024, went into detail about how the Canadian government had set up a working group to study domestic investments by pension funds into infrastructure and other activities as part of the 2024 federal budget.

In 2022 Canadian pension funds invested 18% of their portfolio in shares of domestic listed stocks.

However, over the past decade their domestic investments have proportionally decreased.

The scheme is aimed at improving investment prospects for the country's large pension funds, and there could be a beneficial spin-off for airports.

The main Canadian airports are still operated by not-for-profit stakeholder boards, as they have been for more than three decades. The majority of these stakeholders are from the public sector, although there is some private sector participation.

They are the ones the pension funds, which invest heavily in airports abroad, would be attracted to - at least, initially.

Previously, while some of the funds have indicated a desire to invest in domestic airports, there have been few incentives to encourage them.

A privatisation push for the country's airports which began in 2017 was met with opposition from most of the operators, and there would have to be a sea change in order for them to reappraise their position.

One attraction could be a reduction in the punitive ground rents that airport operators have to pay, or even their elimination - although that seems unlikely.

Another potential spin-off might be a working relationship, which would mean the operators, as well as the funds, working together to acquire and manage foreign airports - offering specialist expertise that the funds might have never had, preferring to allow local management to run the show while retaining their due diligence position.

The essence of this part of the federal budget is the government's desire to encourage competitive 'open' banking, and to persuade pension funds to invest more of their billions at home.

The intention has been there since the autumn of 2023's economic update, which first spoke of the need to find ways for the pension plans to keep more of their funds in the home market.

The campaign that update kicked off picked up steam when dozens of CEOs across sectors from telecom to energy signed an open letter to federal and provincial finance ministers, backing the push to keep more pension money in Canada.

Anchored in a not-for-profit mindset

There are many impediments standing in the way: for example, the questionable ability of the funds to make money out of a sector that is decidedly 'not for profit', and anchored in that mindset, when making a profit for their members is what they exist for.

Secondly, and in any case, they are capped at making investments in most corporations at 30% of voting shares.

Thirdly, Canadian airports lack the scope and scale the funds might find abroad. There is only one genuinely 'global' level airport - at Toronto.

There is less international transfer traffic owing to Canada's geographical situation, and Canadian airports are not grouped as they are in many countries except at a low level, such as those operated by Vantage Airports Group.

(On the other hand, it could be argued that most of the funds have been perfectly happy to invest in individual regional level airports in Europe).

Fourthly, the existence and impact of the ground rents would be incompatible with private sector participation when that sector is expected to invest in infrastructure, at the same time as the ground rents are supposed to assist in the provision of such infrastructure - but often don't.

And finally, there is the same set-in-stone reluctance to change among the majority of operators as there is in the United States.

A pooled fund could be set up

One idea is to create a pooled fund to make deal-making easier for both small and large pension funds.

In Sep-2024 the Toronto-based institutional investor Brookfield Asset Management sought backing from some of the larger pension funds and the government for a new CAD50 billion fund to be set up.

But all this requires a monumental effort of will among disparate parties to overcome the comfortable inertia that has set in where domestic airport ownership is concerned.

Who will buy OTTP's airport stakes?

Shareholders in OTPP's portfolio have a 30-day 'right of first refusal', but could also opt to sell.

OTTP quickly began exploring other suitors. Some have the capability to invest in all of it, while others are likely to be more selective.

In the UK, for example, Australia's Sunsuper might cherish the idea of increasing its equity stake to close to 50% at Birmingham and 100% at Bristol, although at the latter that would acquire greater management accountability, while at London City OMERS might be attracted to increasing its stake. All potential bidders there would, though, be aware of the problems that airport faces.

There is no obvious investor from within the exiting circle at Brussels and Copenhagen airports.

At the latter the Danish pensions firm Arbejdsmarkedets Tillægspension (ATP) has already increased its stake at the expense of two previous investors, including Macquarie, and could be a candidate.

Surprisingly perhaps, there is some speculation about the return of Macquarie, which has previously had stakes in three of the airports, at a time when M&A activity across sectors in the UK at least has been gaining momentum.

There is no blindingly obvious reason why Macquarie would take that action. It has just agreed to sell its 50% stake in three UK airports to AviAlliance and its disposals vastly exceed its acquisitions of late.

See related CAPA - Centre for Aviation report: AviAlliance acquires three smaller UK airports from AGS - what will the future hold for all of them?

A more likely suspect might be PSP Investments, which manages the retirement funds for the Canadian armed forces and Royal Canadian Mounted Police.

In Nov-2024 PSP acquired, through the German subsidiary AviAlliance, the three UK airports referred to above (Aberdeen, Glasgow and Southampton, collectively the AGS Airports group) in a GBP1.5 billion deal - an unexpected transaction that demonstrates a greater degree of belief in the UK market, at least, than might be expected, as each of those three airports has numerous actual and potential issues to overcome.

Whether PSP would want to lumber itself with partial ownership of another three UK airports plus two in Europe at this time is questionable, although it cannot be ruled out.

Many of the big hitters have moved away from Europe

What can be ruled out is any attempt by Ferrovial, the seller of the other 50% of AGS Airports, to re-enter the UK and northern European markets immediately.

Ferrovial is repositioning itself in markets in the Americas.

Ditto firms such as Global Infrastructure Partners, which has also been gravitating away from Europe, and which has previously sold London City Airport, of course, and 'bits' of a range of airports would probably not attract VINCI.

That leaves a potential play by UK investors, although there are few of them now.

Heathrow Airport Holdings has no evident reason to be interested, nor Manchester Airports Group; certainly not in the entire group. Both have deep operational experience and would want to use it, which means at least majority ownership.

As far as the three UK airports go, the British government has been watching foreign investments closely, with hopes of replicating their successes with other projects. Ensuring that UK investors take a bigger interest in domestic assets so that British pensioners reap the benefits of any returns, so it will likely encourage those investors where those airports are concerned at least.

Whether they show up is a different matter.

BREAKING NEWS 03-Dec-2024

On 02-Dec-2024 Denmark's Government, together with SF, Konservative and Radikale Venstre, signed a conditional purchase agreement with Arbejdsmarkedets Tillægspension (ATP) to acquire a majority share in Copenhagen Kastrup Airport.

This is the first known move towards a major change in ownership of an airport in which OTPP is an investor since OTPP's announcement.

Denmark's Ministry of Finance plans to purchase an additional 59.4% of Copenhagen Airports (the part held by Copenhagen Airports Denmark ApS [CAD] including ATP and OTPP) for around DKK32 billion (EUR4.3 billion)

If finalised, it would bring state ownership of the airport to approximately 98%. The purchase agreement has been entered into on market terms, with implementation subject to relevant regulatory approvals.

While the move, which is effectively a renationalisation (the third in the sector in Europe in 2024) has generally found favour in the air transport industry locally and while the purchase agreement includes an "arm's length principle," where the state as owner promises not to interfere in the daily operation of the airport, it has not been universally welcomed publicly with calls for a reduction in state ownership rather than an increase.

The government actually has indicated it will do that, reducing that stake down to 50.01% in the course of time through staged divestments. It remains to be seen if it sticks with that pledge.