Lessons learned from the Henderson debacle
The out-of-court settlement in Janaury between a group of 23 investors and Henderson Global Investors over the management of an ill-fated infrastructure fund is a salutary reminder of the difficulty investors face when trying to claim redress after investments turn sour. The group – including Railpen, the BBC, British Steel and BAE, Kent County Council and South Tyneside, and the endowment funds of Oxford Investment Partners and Trinity College Cambridge – represented £70bn (€81bn) of pension assets under management.
The claimants wanted hundreds of millions of pounds in compensation for an alleged breach of mandate and misrepresentation in the management of the Henderson PFI Secondary fund II. At one point, the fund fell by 60% in value, following Henderson’s use of the bulk of the £575m fund raised in 2005 (plus leverage) to purchase PFI firm John Laing for £1bn in 2006.
The pension funds claimed that the acquisition exposed them unexpectedly to John Laing’s liabilities, such as its PFI bidding business and the company’s spiralling pension fund deficit.
Crucially, the claimants alleged that the bids for John Laing were made without notice, that it was not a “permitted investment” and that there was “no mechanism for the body of investors to be informed of the bid in advance, or to consent to it, and their consent was not sought”.
The settlement involved the pension funds withdrawing their claim in return for Henderson – without any admission of liability – agreeing to pay their legal costs to date. It was the end of a three-year legal battle, which lawyers and trustees had hoped would shed some light on the duties of investment managers towards investors and on the drafting of investment agreements.
But following a three-day preliminary hearing in November 2012, Mr Justice Cooke ruled that the claimants could not bring a derivative claim against Henderson and ordered them to pay the costs of the hearing. The pension funds decided to settle because some were loath to fund further litigation.
The arguments surrounding the risks associated with infrastructure are particularly topical, given the government’s wish to see pension funds invest as much as £20bn in infrastructure projects and the PPF’s establishment of the Pension Infrastructure Platform.
The case underlines the difficulties investors face when trying to agree watertight investment agreements with fund managers or to sue for compensation when investments go wrong.
Gary Cullen, pensions partner at Maclay, Murray & Spens LLP, said: “Investment management agreements often favour the investment manager, rather than the investor, so it is difficult for the investor to claim redress. When you start marking up an investment agreement, fund managers refuse any changes to their standard investment agreements and do not want to indemnify the trustees.
“Investment managers say: ‘There are uncertainties when making investments, and we aren’t willing to underwrite those risks’. If a stock market investment goes down, the investment manager can at least show how the investment fared against the benchmark, but it’s a different world with infrastructure because there’s no clear benchmark.”
However, Robin Ellison, pension partner at Pinsents Mason, said: “Investments can turn sour, despite all the best due diligence in the world. It is a fact of life, and sometimes investors have to just take it on the chin. I just hope this case doesn’t dissuade pension fund managers from being brave in future.”
But a source close to the pension funds, said: “We need trustees to specify in the investment contract exactly what the fund manager can invest in. Henderson told us they would invest in a wide range of infrastructure projects, but when it came to the small print of the contract, it said ‘we can invest in anything we like’.
“The fact they had said they would spread our money across a wide range of infrastructure investments counted for nothing because of a tiny clause in the contract. Instead of having a diversified range of investments, we ended up invested in a company with a large pension fund deficit.”