Balfour Beatty turns to financial engineering with £1bn fund

The idea is that the fund, which will be run by Rob Gregor, former head of European infrastructure at AMP, will buy up and run transport and energy infrastructure assets on behalf of its investors. Which will of course include Balfour itself. Perhaps it has noticed the success of foreign investors like Macquarie in UK infrastructure and utilities and fancied a bit of the action.

What, you may ask, does a heavy construction firm know about asset management? Well, quite a lot in fact. Businesses like Balfour Beatty have been managing assets - schools and hospitals mostly - as part of PFI construction deals for years. So why shouldn’t it make the most of this expertise by launching a fund to do the same?

Admittedly the plan is to invest in a different asset class – road, airport and power schemes being reckoned more lucrative than schools and hospitals in this age of Austerity – but the principle holds good. There should also be plenty of those alchemical ‘synergies’ so beloved of strategy gurus on offer – Balfour has after all a huge amount of expertise in building such assets in the first place, which if nothing else ought to make it a pretty canny buyer. For investors, its involvement should offer the same kind of reassurance that taking a mechanically-minded mate with you does when buying a second-hand car.

The scheme is all part of a drive by Balfour Beatty’s boss Ian Tyler to boost operating margins – to as much as 4% - in what is otherwise a pretty flat market for construction. The firm is also planning to dispose of assets it already holds in the health and education sectors in order to raise £300m for more lucrative projects – and to pay for tastier dividends. ‘The government’s emphasis is changing,’ he said. ‘You’re seeing a switch away from social infrastructure into transport, power and utility assets.’

Tyler also stressed that there would be no blurring of the boundaries between the fund managers and the rest of the business when it comes to taking on contracts related to assets under management. ‘The fund will be run in the best interests of investors and that means that sometimes we will not be the best contractor for a job’ he told the FT this morning. So that’s alright then.

The news has been well received in the City – Balfour’s share price rose on the announcement, while analysts generally welcomed the fact that Balfour would be putting some ‘skin in the game’.

Here at MT we’re inclined to agree. Financial engineering may have got a bit of a bad name recently, but done properly and with the right attitude it can be a win-win. It’s good to see a British firm taking the initiative for once, rather than yet another foreign bank or private equity outfit.