A Dutch investor kicked off a new investment market in the UK this week with the purchase of two Private Finance Initiative companies for more than £20m.
The companies, bought by Kerkehout Beheer, were special-purpose vehicles formed to develop two 4,500m2 office buildings as part of a contract won from the government under PFI. The initiative brings in private funding to run public services on long-term contracts; in this case to construct and run offices for a government department.
The buildings – Elgin House in Edinburgh and Cotton House in Glasgow – were built for the government’s tax department, the Inland Revenue. The special purpose vehicles were formed by GA Properties, a subsidiary of Dutch construction firm HBG.
The deal is believed to be the first time a PFI vehicle has been sold on as an investment. Most PFI deals cannot be sold on for three to five years, but in this case it was only 12 months.
Alistair McEwan, a partner at Maclay Murray & Spens, which acted for Kerkehout Beheer, said: “This type of deal offers a potentially greater return than a standard property venture, around 15% compared to 7%.
“But if the service is not delivered to the contracted standard, then penalties are incurred that could result in a total loss of income.
“As constraint periods lapse on PFI vehicles, we expect to see more deals like this. Buying a company rather than a property also avoids the higher rate of stamp duty.”
Michael Medlicott, of Nomura’s Servus Holdings, which bids for PFI contracts, said: “If constraints on PFI vehicles are lifted, then I could see it being an attractive investment, though more so for single-building or small portfolio PFIs rather than large complex estates.”
David Metter, of PFI investor Innisfree, said: “We would rather put our second- stage PFI projects into a REIT. But PFI special-purpose vehicles will be attractive because the covenant is obviously the best and the risk is performance risk rather than market risk.”
