Auckland Airport – Reject recommendation is correct

December 20

The board of Auckland International Airport (AIA) made a wise decision when it recommended rejection of the Canadian Pension Plan Investment Board’s partial takeover offer, because the company is likely to receive a better offer in the future.

This is because of the huge growth in sovereign wealth funds and their quest to acquire long term infrastructure assets, including airports.  These funds are receiving a great deal of comment in the United States at present because the two largest, UAE’s Abu Dhabi Investment Authority and Singapore’s GIC, have recently invested US$7.5 billion in Citigroup and US$9.7 billion in UBS respectively.  It was also announced overnight that the China Investment Corporation has invested US$5 billion in Morgan Stanley. 

These sovereign wealth funds, which are directly funded by governments, are fairly secretive but Morgan Stanley has estimated the largest ten as follows.

Sovereign Wealth Funds - Investment Giants of the Future!

Country	Fund	Assets (US $ bn)
UAE	Abu Dhabi Investment Authority	875
Singapore	Got. of Singapore Investment Corp (GIC)	300
Saudi Arabia	Various Funds	300
Norway	Government Pension Fund	300
China	China Investment Corporation	300
Singapore	Temasek Holdings	100
Kuwait	Kuwait Investment Authority	70
Australia	Australian Future Fund	40
US (Alaska)	Permanent Fund Corporation	35
Russia	Stabilisation Fund	32

Source: Morgan Stanley

There are nearly 30 sovereign wealth funds at present with total assets of US$3,000 billion. Merrill Lynch believes that these will grow to US$8,000 billion by 2011 while Morgan Stanley is predicting US$12,000 billion by 2012. 

As sovereign wealth funds should have more than 50% of total assets in equities, and the total value of global listed equities is approximately US$33,000 billion at present, then these funds will have a huge demand for top class investments in the years ahead.  Airports are particularly attractive to these funds, and other long-term investment funds, because their earnings are relatively stable and secure.

Although the Canadian Pension Plan Investment Board (CPPIB) is not a sovereign wealth fund - because it receives direct contributions from employees - it is in competition with these government funds to acquire top rated investments.  The determination of CPPIB, which is the world’s 18th largest pension fund with over US$100 billion under management, to acquire a major interest in Auckland Airport shows the attractiveness of this asset.

The new AIA board should be able to attract a better offer for the company because it represents a great investment for large sovereign and pension funds. 

Brian Gaynor, 20 December 2007