Friday Letter: A big and complicated task

GIP’s purchase of Gatwick should remind the public and politicians that private capital investors often take on enormous responsibilities and complex risk in deals that can benefit everyone.

The backlash against the EU alternative investment fund manager directive is getting louder.

The European Central Bank yesterday warned that the proposed EU regulations could place Europe’s private equity industry at a competitive disadvantage to non-EU funds, echoing an earlier report from the UK’s Financial Services Authority that also estimated private equity firms would face billions in related compliance costs. Even London mayor Boris Johnson joined the fray, after a study commissioned by his office found the proposed regulation could hamper the city’s prime place at the heart of the private equity industry.

All of this is good news for the industry. However, the directive's fate is ultimately down to the European Parliament and Council members, many of whom remain hostile to private equity. Industry lobbyists can only be hoping that their adversaries in Brussels retain some willingness to question the “strip-and-flip” and “idle fat cat”-type clichés that at least some of them subscribe to about private equity. The task is to persuade them that private equity does a lot more.

Private equity funds often invest in complicated assets in need of very hard restructuring work. When they get it right, their efforts not only benefit themselves and their investors, but also various other stakeholders such as company employees, customers and, depending on the nature of the asset being purchased, the public at large. At the outset, the route to success is rarely straightforward, especially in today’s environment when multiple expansion as a value driver has largely disappeared. In committing to an asset, private equity investors take on complexity, responsibility and risk.

This week’s £1.5 billion acquisition of London Gatwick Airport agreed by Global Infrastructure Partner illustrates this perfectly. Gatwick is the epitome of an emotive asset. Serving 32 million passengers a year, it holds a crucial place in the world’s transportation infrastructure – it is the UK’s second largest airport and the sixth largest in Europe. It is also the busiest single-runway airport in Europe, a statistic that will be hard to change, because local authorities long ago imposed a ban until 2019 on construction of a second runway – and environmentalists are fiercely opposed to the idea.

Gatwick is also notorious for chaotic and depressingly long check-in queues, with existing facilities estimated to need at least £900 million in upgrades over the next four years. The airport employs 23,000 workers, affiliated with the UK’s biggest labour union, Unite, which has in the past campaigned against private equity sponsors. Both the workers and the travellers want Gatwick to be a better airport, and GIP’s mandate is to deliver it. 

Throw in the fact that UK media scrutiny of the new owners has already been intense and will continue to be so, and the point that airports are vulnerable to economic cycles, and there is no denying that GIP has a big, big task ahead.

Anyone can buy an asset. They question is, can you make it more valuable without riding roughshod over the other stakeholders?

For GIP to get the result it clearly believes is achievable here, it will take clear thinking and a lot of heavy lifting. If GIP succeeds, it will have mastered a big challenge, and the firm deserves credit for taking it on. Politicians, and those who arbitrarily love to hate all things “Wall Street”, should sit up and take notice

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