Changes to Investment Advisory Agreement

RNS Number : 6919M

International Public Partnership Ld

29 August 2013

 



29 August 2013

 Changes to Investment Advisory Agreement

International Public Partnerships Limited (INPP), the listed infrastructure investment company, which invests internationally in public infrastructure projects, today announces that further to the announcement of 2 July 2013, the Board has agreed to amendments to the Investment Advisory Agreement that it believes are beneficial to the Company's shareholders ("Shareholders").

A circular (the "Circular") is being sent to Shareholders today to convene an Extraordinary General Meeting of International Public Partnerships Limited ("INPP" or "the Company") on 23 September 2013. The Extraordinary General Meeting is being called in order to seek the approval of Shareholders to certain amendments to the terms of appointment of Amber Fund Management Limited ("Amber") as Investment Advisor to the Company.  Since the changes are treated as a related party transaction for the purposes of the Listing Rules, approval of the Company's Shareholders is required.

In particular, the Board is proposing to Shareholders the following changes to the Investment Advisory Agreement under which Amber is appointed to provide investment advisory services to the Company:

·          abolition of any right to receive any future incentive fee under the Investment Advisory Agreement with effect from 1 July 2013 (although the fee accrued to 30 June 2013 will be paid);

·          reduction in base management fees such that they will reduce to 0.9% on such part of Gross Asset Value ("GAV") as exceeds £1.5bn;

·          exclusions from the definition of GAV for the purpose of calculating base management fees of the amount of any additional cash raised from shareholders in any future capital raisings or tap issues until that cash is invested for the first time;

·          a revision to the term of the Investment Advisory Agreement by changing the start date of the existing term provisions to September 2013;

·          the replacement of the existing mechanism for early termination of the Investment Advisory Agreement, which is linked to the relative performance of the Company's shares to UK gilts, with (i) a new mechanism allowing for early termination if less than 95% of the Company's assets are available for use for certain periods and the Investment Advisor fails to implement a remediation plan agreed with the Company, and (ii) enhanced rights for the Company to monitor and manage Amber in order to reflect certain changes to the Listing Rules that were effective from 1 August 2013; and

·          the abolition of the reference to specified individuals in the clause in the Investment Advisory Agreement requiring sufficient resource to be applied to the Company's affairs in recognition of growth at Amber since its management buyout in 2009 (but otherwise maintaining that clause).

Also, the Company proposes to make payment of 60% of the accrued incentive fee as at 30 June 2013 in new shares (issued at the volume weighted average trading price for the Company's shares over the 20 business days from 1 July 2013) in accordance with the power granted by Shareholders at the Company's annual general meeting on 12 June 2013.

Consequential changes would also need to be made to the Partnership Agreement under which International Public Partnerships Limited Partnership, a limited partnership through which the Company holds assets (the "Partnership") is constituted and the general partner of which is an Amber group company, and to the Operating Agreement under which Amber is appointed to operate the Partnership, in order to bring these documents in line with the amendments being proposed to the Investment Advisory Agreement.  These changes will also need to be approved by Shareholders.  In this announcement, references to changes to the Investment Advisory Agreement should therefore be understood to include the necessary consequential changes to these other documents.

BACKGROUND TO THE CHANGES

Business Growth

The Board believes that the INPP - Amber relationship has worked well and continues to do so.  This has resulted in continued investor support for the growth of the Company, including a series of successful capital raisings.

In order to facilitate further growth of the Company, however, consideration needs to be given to changing trends in the market and the views of shareholders. A clear message from both existing and prospective investors relates to the existence of the incentive fee and the possible impact this may have on some investors' willingness to support future growth in the Company.

Background to the Proposed Reductions to Fees

The current incentive fee has applied since the Company's initial public offer (the "IPO"). The concept and mechanism for the incentive fee was tested at the time of the IPO and was seen as appropriate.  However, the Board has been advised that over time, investor attitudes to the incentive fee have changed, to the extent that it believes removing the incentive fee would now be appropriate.  The Board believes that removing the incentive fee is significantly in the interests of shareholders as in certain situations future incentive fees could, depending on circumstances out of the control of the Company, otherwise be material.  It would also bring the Company in line with those funds that the Board views as the Company's peers.

With respect to base fees, the Board has kept these under regular review.  In June 2012, the base fee charged to the Company by Amber was reduced (in respect of that part of the GAV relating to operational assets in excess of £750 million) from 1.2% to 1%. This reduction kept the base fee in line with that charged in respect of the peer funds.

The Board now believes that in order to bring the Company in line with certain of its peer funds, the base fee should be amended so that, if and when the Company's GAV relating to operational assets exceeds £1.5 billion, the base fee on amounts in excess of this figure will be further reduced to 0.9%.

Finally, the Board believes that the current calculation methodology for GAV should change in order to exclude from the definition of GAV for the purpose of calculating base management fees the amount of any additional cash raised from shareholders in any future share issues (including tap issues) until that cash is invested for the first time.

Contract Term and Performance Conditions

As with the incentive fee, the original term of the Investment Advisory Agreement was researched carefully prior to the establishment of the Company. A long term contract was, and still is, viewed as desirable for both the Company and its Investment Advisor, due to the long term and (relatively) illiquid nature of infrastructure assets and the fact that both the Company and its Investment Advisor recognise that the Company's success depends on the long term performance and management of its assets.  In addition, the focus that the Company has on construction assets requires a longer term investment horizon and also differentiates it from its peer funds.

The original term of the Investment Advisory Agreement was a ten year contract to October 2016 with a five year termination notice period capable of being given at any time after that date. The Board believes that a long term contract is in the interests of investors and is in fact desirable as it promotes management stability provided that the Company is able to terminate the Investment Advisory Agreement earlier in certain circumstances such as where its Investment Advisor breaches the Investment Advisory Agreement in a way that has a material adverse effect on the Company or where performance falls below expectations.  As a quid pro quo of removing the incentive fee, reducing the base fee and removing the possibility of base fees being charged on uninvested capital from future share issues, it is proposed that the term now be amended to renew the ten year fixed term and five year notice period, with the fixed term starting on the date the changes take effect.  This would mean that the fixed term (subject to earlier termination for breach or poor performance by Amber) would end in September 2023, after which five years' notice could be given at any time (so the earliest the contract could be terminated ordinarily would be September 2028), which effectively grants a seven year contract extension to Amber.

The Company already has the right to terminate the Investment Advisory Agreement in various circumstances including if, in the reasonable opinion of the Company, a material amount (in number and seniority) of the Investment Advisor's employees have ceased to be employed by the Investment Advisor or are no longer dedicated to the provision of services to the Company.  No change is proposed to this right.  However the Investment Advisory Agreement also currently provides that if any two of Giles Frost, Hugh Blaney or Michael Gregory cease to be employed by the Investment Advisor then this may be prima facie evidence of an insufficiency of resources.  While there is no current suggestion of any change in the Investment Advisor's senior management, given the growth of the Investment Advisor's business and the broadening of its senior management since the time this provision was first included, it is proposed that it be deleted as no longer being of relevance.

In addition, a new provision is proposed to be introduced granting the Board additional rights which could in certain circumstances lead to early termination of the Investment Advisory Agreement in the event of underperformance in the Company's portfolio due to continued and unremedied failings by the Investment Advisor.  The bulk of the Company's revenues ultimately depend on the infrastructure assets that it invests in being available for use by their public sector and other users.  It is therefore proposed that to the extent that less than 95% of these assets are available for use (or are unable to come into use because of delayed construction) then the Company should have additional rights.  In particular if less than 95% of such assets are available for use (or are unable to come into use because of delayed construction) for a period of three months or more twice during a rolling period of two years due to an act or omission of the Investment Advisor then the Company shall have the right to require the Investment Advisor to implement a remediation plan and upon any further recurrence in the following 12 months in circumstances where the Investment Advisor has not implemented the remediation plan, the Company will have the right to terminate the Investment Advisory Agreement on six months' notice.  This new provision would replace the existing performance test in the Investment Advisory Agreement (which is linked to the relative performance of the Company's shares compared to UK gilts) which is believed by the Board to be insufficiently linked to the performance of the Company's assets and does not necessarily reflect the Investment Advisor's performance. 

These proposed changes are additional to and without prejudice to the Company's other existing rights to terminate the Investment Advisory Agreement in certain circumstances including where the Investment Advisor is no longer able to provide services, including insolvency, lack of relevant authorisation, change of control, material departures of employees and in the case of a breach of any service level agreement that has occurred more than three times and which has not been remedied within 30 calendar days of it first occurring. 

Enhanced Ability of the Board to Monitor and Manage the Investment Advisor

On 1 August 2013, the Listing Rules were amended to include a requirement for the board of directors of an investment company whose shares are listed on the Official List to effectively monitor and manage the performance of its key service providers, including any investment manager appointed by the issuer, on an ongoing basis.

Whilst the Board believes that it currently effectively manages and monitors Amber, and the existing Investment Advisory Agreement gives the Board rights to information and obliges Amber to act in accordance with its proper instructions, certain changes are proposed in order to enhance and formalise these rights.  In particular it is proposed that the current practice of Amber submitting a quarterly report (and more often upon reasonable request) setting out details of the performance of each of the underlying infrastructure investments invested in by the Company in order that the Board can effectively monitor and manage the Investment Advisor be formalised in the Amended Investment Advisory Agreement.   Similarly, in order for the Company to comply with its obligations to effectively manage the performance of the Investment Advisor, it is proposed that a new provision is added to the Investment Advisory Agreement that requires the Investment Advisor (so far as it is legally able) to act in accordance with any proper instructions that the Company may give it with regard to the management of the underlying infrastructure investments invested in by the Company.

Benefits of the changes

The Board believes that changing the contract terms in this way would be beneficial to the Company and its Shareholders for the following reasons:

(a)       the Company will avoid the risk of being obliged to make significant future incentive fee payments to the Investment Adviser which do not reflect the true underlying performance.  The Company believes that in the absence of such changes this would be a likelihood;

(b)       the Company will obtain additional prospective future reductions in the base management fee as detailed above;

(c)        the changes would not require payments from either party to amend the agreements;

(d)       a long term contract is a worthwhile quid pro quo for the Company and allows the Investment Advisor the confidence to develop prospective investment opportunities over the period of time necessary for them to become viable investments for the Company, ensuring that the Company can benefit from the full range of investment opportunities open to it;

(e)       the projects in which the Company invests, particularly the construction assets, and their return profiles are long term (for instance, the current average concession length remaining of the Company's investments is 23 years) and therefore require a long term perspective in their management;

(f)        the replacement potential termination right linked to the non-availability of the Company's assets means that notwithstanding the extended term of the appointment, the Board will have a right of termination where the Company's revenues (and thus its ability to pay dividends) are adversely affected due to infrastructure projects being unavailable for use for extended periods due to the culpability of the Investment Advisor;

(g)       the Board will have enhanced ability to monitor and manage Amber, and the provisions of the Investment Advisory Agreement in this regard will reflect the recent changes to the Listing Rules; and

(h)       the Board believes that by giving Amber some certainty of duration in the length of its contract with the Company, Amber can feel more comfortable in devoting its resources and time to the Company rather than diversifying its focus to hedge against the risk of termination of its agreement with the Company.

Structure of changes

The proposed changes are being put forward for adoption as a package; unless all of the changes are approved, none of them will be made.  As such, if the single resolution being proposed at the Extraordinary General Meeting (the "Resolution") is not passed, no amendments will take effect and the current provisions of the Investment Advisory Agreement, Partnership Agreement and Operating Agreement will remain in force (including the current fee structure) and could result in incentive fees becoming payable in future periods that do not reflect true underlying performance.  The Independent Directors of the Company do not believe that retaining the current provisions is in the best interests of the Company.

The amended agreements have been agreed by their respective parties but will not be entered into until, and are conditional upon, shareholder approval of the amended agreements.  Accordingly, the changes would be implemented immediately (and in the case of the incentive fee only, retrospectively from 1 July 2013) upon Shareholder approval.

MATTERS REQUIRING SHAREHOLDER APPROVAL

Since Amber is a "related party" of the Company within the meaning given to that term in the Listing Rules and the impact of the relevant changes is such that Chapter 11 of the Listing Rules therefore applies, before the changes to the Investment Advisory Agreement, Partnership Agreement and Operating Agreement can take place, the Shareholders are required to provide their approval.

Accordingly, the Company is seeking Shareholder approval to the entry into the following agreements with Amber or its associated companies:

(a)       an agreement between the Company and Amber to amend and restate the Investment Advisory Agreement;

(b)       an agreement between International Public Partnerships Lux 2 S.à r.l. ("Luxco 2") as limited partner of the Partnership and International Public Partnerships GP Limited (the "General Partner") as general partner of the Partnership to amend and restate the Partnership Agreement  ; and

(c)        an agreement between the General Partner as general partner of the Partnership and Amber to amend and restate the Operating Agreement ,

(such agreements together being the "Amended Agreements").

A single resolution has been proposed approving all of the agreements as a package and as such, none of the amendments will take effect unless the Resolution is passed.

RECOMMENDATION AND DIRECTORS' VOTING INTENTIONS

The Board has established a committee comprising all of the Independent Directors (which excludes Giles Frost) for the purpose of evaluating the matters set out in this Circular.  Mr. Frost has not participated in these deliberations due to the fact that, as an associate of Amber, he has an interest in the implementation of the proposed changes.

The Board considers that the Resolution and the entry by the Company and its subsidiary entities into the Amended Agreements are in the best interests of the Company and its Shareholders as a whole.  In addition, the Board, which has been so advised by Numis Securities Limited, consider the changes to the Amended Agreements to be fair and reasonable so far as the Shareholders are concerned.  Accordingly the Board unanimously recommend all Shareholders to vote in favour of the Resolution.

Each of the Independent Directors intends to vote in favour of the Resolution in respect of their shares.

Expected Timetable

Deadline for receipt of Form of Proxy	2.30pm on 19 September 2013
Extraordinary General Meeting	2.30pm on 23 September 2013
Announcement of results of Extraordinary General Meeting	No later than 8am on 24 September 2013
Effective date of changes (assuming the Resolution is passed)	23 September 2013

The Circular was published yesterday and will be posted to Shareholders today, as well as being available on the Company's website (http://www.internationalpublicpartnerships.com).

Unless otherwise defined, capitalised words and phrases in this Announcement shall have the meaning given to them in the Circular.

Amber Infrastructure Erica Sibree	[phone]
Numis Securities Nick Westlake Hugh Jonathan	[phone]
FTI Consulting Ed Berry Harry Stein	[phone] [phone]

About International Public Partnerships:

International Public Partnerships (INPP) is a listed infrastructure investment company which invests in global public infrastructure projects developed under the public private partnerships (PPP), private finance initiative (PFI), regulated asset and other similar procurement methods.

Listed in 2006, INPP is a long-term investor in 122 social and transport infrastructure projects, including schools, hospitals, courts, police headquarters, transport and utility and transmission projects in the U.K., Europe, Australia and Canada. INPP seeks to provide its shareholders with both a long-term yield and capital growth through investment across both construction and operational phases of 25-40 year concessions.

Amber Fund Management Limited is the Investment Advisor to INPP and consists of approximately 70 dedicated staff who manage, advise on and originate projects for INPP.

Visit the INPP website at www.internationalpublicpartnerships.com for more information.

 

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