contact@industreams.com
InduStreams.com & Port-Investor.com
POST-­‐CRISIS	
  INVESTING:	
  	
  
HOW	
  HUTCHISON	
  AND	
 ...
contact@industreams.com
InduStreams.com & Port-Investor.com
Introduc>on	
  
It	
  used	
  to	
  be	
  all	
  about	
  the	...
contact@industreams.com
InduStreams.com & Port-Investor.com
What	
  Hutchison	
  and	
  others	
  are	
  doing	
  (1)	
  
...
contact@industreams.com
InduStreams.com & Port-Investor.com
What	
  Hutchison	
  and	
  others	
  are	
  doing	
  (2)	
  
...
contact@industreams.com
InduStreams.com & Port-Investor.com
What	
  Hutchison	
  and	
  others	
  are	
  doing	
  (3)	
  
...
contact@industreams.com
InduStreams.com & Port-Investor.com
What	
  Hutchison	
  and	
  others	
  are	
  doing	
  (4)	
  
...
contact@industreams.com
InduStreams.com & Port-Investor.com
What	
  Hutchison	
  and	
  others	
  are	
  doing	
  (5)	
  
...
contact@industreams.com
InduStreams.com & Port-Investor.com
The	
  general	
  trend	
  
The	
  stated	
  examples	
  are	
...
contact@industreams.com
InduStreams.com & Port-Investor.com
A.	
  Avoiding	
  predic>on	
  failure	
  (1)	
  
It	
  used	
...
contact@industreams.com
InduStreams.com & Port-Investor.com
A.	
  Avoiding	
  predic>on	
  failure	
  (2)	
  
But	
  with	...
contact@industreams.com
InduStreams.com & Port-Investor.com
B.	
  Thinking	
  in	
  business/inv.	
  models	
  (1)	
  
Wit...
contact@industreams.com
InduStreams.com & Port-Investor.com
B.	
  Thinking	
  in	
  business/inv.	
  models	
  (2)	
  
A	
...
contact@industreams.com
InduStreams.com & Port-Investor.com
B.	
  Thinking	
  in	
  business/inv.	
  models	
  (3)	
  
And...
contact@industreams.com
InduStreams.com & Port-Investor.com
B.	
  Thinking	
  in	
  business/inv.	
  models	
  (4)	
  
Thi...
contact@industreams.com
InduStreams.com & Port-Investor.com
C.	
  Using	
  “real	
  op>ons”	
  (1)	
  
In	
  a	
  world	
 ...
contact@industreams.com
InduStreams.com & Port-Investor.com
C.	
  Using	
  “real	
  op>ons”	
  (2)	
  
	
  
	
  
	
  
	
  ...
contact@industreams.com
InduStreams.com & Port-Investor.com
What	
  comes	
  next?	
  
In	
  the	
  next	
  ar>cle	
  on	
...
contact@industreams.com
InduStreams.com & Port-Investor.com
Disclaimer	
  
This	
  presentaOon	
  is	
  issued	
  for	
  i...
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Post-crisis investing: How global investors employ new models

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All sectors have been hit by the global economic crisis. In this presentation we take a look at infrastructure investors, more specifically sea port investors, to see how the best in the market are changing the way they invest. For more please go to www.port-investor.com.

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Post-crisis investing: How global investors employ new models

  1. 1. contact@industreams.com InduStreams.com & Port-Investor.com POST-­‐CRISIS  INVESTING:     HOW  HUTCHISON  AND  OTHERS  EMPLOY  NEW  MODELS    
  2. 2. contact@industreams.com InduStreams.com & Port-Investor.com Introduc>on   It  used  to  be  all  about  the  markets,  well,  mostly  at  least.  Which  markets   are  hot  and  which  are  not  (and  “picking  the  winners”).       Whereas  this  is  s>ll  something  the  global  port  investors  clearly  obsess   about,  a  clear  difference  is  possible  to  spot  for  those  who  have  been   around  some  years  in  the  sector.       In  short,  they  are  star>ng  to  focus  much  more  on  the  models  they  use  to   invest  and  extract  value  from  their  porColios.  And  as  part  of  that  they   employ  models  that  assume  much  more  vola>lity  in  the  markets  than   previously.         In  this  short  piece  we  will  be  illustra>ng  this  trend  with  a  few  samples   and  uncover  some  of  the  key  things  the  best  in  the  market  are  doing   differently.    
  3. 3. contact@industreams.com InduStreams.com & Port-Investor.com What  Hutchison  and  others  are  doing  (1)   One  of  the  most  notable  cases  was  the  Hutchison  Port  Trust  IPO  in  Singapore.         In  one  single  move  Hutchison  Port  Holdings  (HPH)  transformed  their  return   exposure  completely  for  all  their  Pearl  River  Delta  (PRD)  assets  when  they  IPO’ed   them  on  the  Singapore  Stock  Exchange.  Not  only  did  they  secure  a  substan>al   part  of  the  poten>al  future  cash  flows  they  also  placed  themselves  in  a  role  that   gives  them  many  >mes  the  upside  compared  to  the  stake  they  have  leP  in  the   game.     In  2010/11  when  HPH  was  faced  with  decisions  concerning  their  PRD  porColio,   including  their  very  profitable  Hong  Kong  and  Shenzhen  ac>vi>es,  they  probably   looked  at  something  resembling  the  spread  of  poten>al  returns  shown  on  next   slide.    
  4. 4. contact@industreams.com InduStreams.com & Port-Investor.com What  Hutchison  and  others  are  doing  (2)   Note:  The  figures  used  are  just  samples,  they  do  not  reflect  specific  es>mates  (and  we  are  only  talking   about  HPH  here  rather  than  the  wider  set  of  owners  behind  the  assets  for  simplifica>on).   Market  drivers   Return  (NPV)   -­‐$5bn   +$5bn   Market  drivers   Return  (NPV)   -­‐$5bn   +$5bn   The  diagram  displays  a  spectrum  from  the  least  op>mal  to  the  most  op>mal   market  condi>ons  and  a  corresponding  value  of  the  HPH  PRD  assets  (in  NPV)   when  matched  against  a  poten>al  sale  (or  in  this  case  proceeds  from  an  IPO)  at   $5bn.  
  5. 5. contact@industreams.com InduStreams.com & Port-Investor.com What  Hutchison  and  others  are  doing  (3)   In  the  diagram  to  the  leP  (previous  slide),  HPH  would  be  assuming  that  under   reasonable  market  condi>ons  they  would  enjoy  the  same  future  cash  flows  as   what  they  would  gain  in  proceeds  from  a  sale  and  obviously  would  gain  more  by   retaining  their  holdings  under  more  favorable  condi>ons  (and  vice  versa).     Whether  HPH  saw  more  downside  than  upside  has  been  speculated  on  and  it  is  of   course  en>rely  possible  that  they  might  have  been  looking  at  a  fla]ening  of  the   upside  poten>al  as  illustrated  in  the  diagram  to  the  right  given  the  market   supply/demand  situa>on  and  associated  rate  environment.     That  however  is  not  so  relevant  to  the  issue  at  hand.  The  interes>ng  part  is  the   constella>on  they  put  in  place  as  part  of  their  divestment.  Had  they  just  divested   the  majority  of  the  holdings  you  could  argue  that  they  would  have  simply  reduced   up-­‐  and  downside.  But  instead  they  made  a  managing  role  for  themselves,  not   en>rely  different  from  the  more  tradi>onal  PE  structures,  in  which  they  receive   bonus  based  on  performance.  BUT  this  was  done  without  adding  to  the  down  side   (see  next  slide).  
  6. 6. contact@industreams.com InduStreams.com & Port-Investor.com What  Hutchison  and  others  are  doing  (4)   In  short  HPH  substan>ally  reduced  their  down  side  and  instead  put  in  place  a   structure  that  would  allow  them  exposure  to  a  poten>al  upside  many  >mes  that   of  the  capital  deployed.   Market  drivers   Return  (NPV)   -­‐$5bn   +$5bn   Market  drivers   Return  (NPV)   -­‐$5bn   +$5bn  
  7. 7. contact@industreams.com InduStreams.com & Port-Investor.com What  Hutchison  and  others  are  doing  (5)   A  more  recent  example  would  be  the  China  Merchant  Holdings  Interna>onal   (CMHI)  acquisi>on  of  part  of  the  CMA  terminal  porColio  for  a  reported  amount  of   €400mn.                           Very  simplified  the  return  exposure  might  have  been  as  outlined  above  in  the   diagram  to  the  leP.    But  it  is  possible,  as  was  rumored,  that  CMHI  nego>ated  a   guarantee  providing  them  with  a  minimum  return  for  the  first  7  years  of  7-­‐8%,   substan>ally  reducing  the  poten>al  downside  of  the  investment  (as  outlined  in   the  diagram  to  the  right).   Market  drivers   Return  (NPV)  +€400mn   -­‐€400mn   Market  drivers   Return  (NPV)  +€400mn   <€250mn  
  8. 8. contact@industreams.com InduStreams.com & Port-Investor.com The  general  trend   The  stated  examples  are  just  a  few  snippets  of  what  is  visible  to  the  public  when   looking  at  press  releases  and  other  such  sources.       From  direct  deal  involvement  it  is  clear  to  us  that  in  par>cular  the  more   established  operators  and  investors  are  star>ng  to  behave  very  different  in  their   investment  and  porColio  management  approach.       It  does,  however,  not  look  like  an  across  the  board  change  in  the  way  these   organiza>ons  work  internally.  Governance  and  procedures  seem  to  remain  the   same.  As  example  in  the  form  of  some  one-­‐line  projec>ons  to  support  a  business   case  that  goes  to  the  board.     But  in  these  organiza>ons  are  people  who  have  been  through  many  investment   cases  and  today  sit  with  what  is  oPen  a  mixed  bag  of  assets.  These  decision-­‐ makers  are  not  relying  on  predic>on  accuracy  anymore.     So  what  are  they  doing?  
  9. 9. contact@industreams.com InduStreams.com & Port-Investor.com A.  Avoiding  predic>on  failure  (1)   It  used  to  be  the  general  belief  that  by  pulng  enough  resources  to  work  you   should  get  a  fairly  precise  es>mate  of  a  poten>al  set  of  market  drivers.  Drivers   that  in  turn  could  be  used  to  make  a  business  case  and  in  general  form  a  business   model  around  to  op>mize  returns  for  the  specific  investment  in  ques>on.                         Market  drivers   Return  (NPV)   Market  drivers   Return  (NPV)   -­‐$500mn   +$500mn   -­‐$500mn   +$500mn  
  10. 10. contact@industreams.com InduStreams.com & Port-Investor.com A.  Avoiding  predic>on  failure  (2)   But  with  a  market  now  li]ered  with  projects  that  in  the  worst  case  have  no  cargo   or  prospects  of  gelng  any  material  such,  this  is  changing.  As  men>oned  for  some   reason  it  s>ll  seems  to  be  the  norm  in  terms  of  the  actual  governance  and  process   surrounding  decision-­‐making  for  inves>ng  and  asset  management  but  the   experienced  execu>ves  are  not  buying  it.       And  so  they  simply  assume  a  much  larger  poten>al  fall-­‐out  range  (see  right   diagram  versus  leP  diagram  above).     For  a  more  in  depth  look  at  market  vola>lity  in  the  port  markets,  please  see:     www.port-­‐investor.com/market-­‐vola>lity    
  11. 11. contact@industreams.com InduStreams.com & Port-Investor.com B.  Thinking  in  business/inv.  models  (1)   With  that  backdrop  it  becomes  important  to  dis>nguish  between  market  drivers   and  the  model  you  employ  to  transform  these  into  return.                         Another  way  to  think  of  this  would  be  to  consider  the  market  drivers  as  the   variable  “x”  and  the  business  or  investment  model  employed  as  “f(x)”  and  the   returns  generated  from  these  as  “y”.             Market  drivers  (or  x)   Return  (or  y)   Business/investment  model  (or  f(x))  
  12. 12. contact@industreams.com InduStreams.com & Port-Investor.com B.  Thinking  in  business/inv.  models  (2)   A  few  examples  given  below  on  what  cons>tutes  the  aspects  considered  in  terms   of  drivers  versus  model.                                         Market  (drivers)   Model  (inv./business)     §  Volume   §  Rates   §  Unit  costs   §  Tax   §  Interest  rates   §  Etc.   §  Concession  terms   §  OperaOng  model   §  Expansion,  phasing  and   other  opOons   §  Funding  and  ownership   model   §  Deal  structure   §  Etc.  
  13. 13. contact@industreams.com InduStreams.com & Port-Investor.com B.  Thinking  in  business/inv.  models  (3)   And  of  course  the  goal  for  these  operators  and  investors  is  to  create  a  model  that   looks  like  the  model  to  the  right  and  avoid  the  one  to  the  leP  (or  transform  it).  In   other  words  working  to  employ  a  model  that  provides  most  possible  upside  and   least  possible  downside  when  considering  a  wide  range  of  possible  market   scenarios.  
  14. 14. contact@industreams.com InduStreams.com & Port-Investor.com B.  Thinking  in  business/inv.  models  (4)   This  is  in  stark  contrast  to  what  most  are  s>ll  doing  today,  which  is  op>mizing   factors  in  the  model  around  a  decision  base  or  single  point  rather  than  the  whole   spectrum.     Working  with  increased  focus  on  the  model  itself  also  has  the  benefit  that   through  the  full  cycle  from  pre-­‐  to  post-­‐investment,  you  have  control  of  the   model,  you  make  the  decisions  that  govern  it.  Not  so  for  the  market  drivers  which   you  can  at  best  try  to  impact.  Or  to  put  it  another  way,  you  may  not  be  able  to   dictate  the  terms  for  e.g.  a  specific  concession  but  ul>mately  you  decide  whether   or  not  to  take  it.       Ironically  despite  this,  mistakes  by  investors  in  terms  of  the  models  employed   have  previously  at  large  been  ignored  (although  they  have  been  in  full  control  of   these).  This  as  opposed  to  market  predic>on  mistakes  that  have  been  discussed  in   great  detail  (despite  the  obvious  limita>ons  cons>tuents  have  in  this  regard).  
  15. 15. contact@industreams.com InduStreams.com & Port-Investor.com C.  Using  “real  op>ons”  (1)   In  a  world  that  is  fully  predictable  op>ons  have  no  value.  But  in  a  world  with   plenty  of  variance  they  are  tremendously  valuable.     And  what  is  more,  they  permeate  all  walks  of  the  models  we  employ  and  thereby   our  return  exposure.     As  very  simple  illustra>on  we  can  use  put  op>ons  and  expansion  op>ons  (or   exclusivi>es  that  secure  upside)  to  illustrate  how  real  op>ons  impact  return   exposure  (see  next  slide).     In  the  leP  diagram  restric>ons  or  lack  or  op>ons  or  en>tlements  is  curbing  the   upside,  whereas  a  put  op>on  is  used  to  limit  the  downside  in  the  diagram  to  the   right.    
  16. 16. contact@industreams.com InduStreams.com & Port-Investor.com C.  Using  “real  op>ons”  (2)                           Real  op>ons  or  flexibili>es  and  en>tlements  come  in  all  shapes  and  forms.  Some   are  very  obvious  and  easy  to  spot  whereas  others  are  more  complicated  and   hidden  in  legal  terms  or  inherent  in  e.g.  the  chosen  opera>ng  model.   Market  drviers   Return  (NPV)   Market  drivers   Return  (NPV)   -­‐$500mn   +$500mn   -­‐$500mn   +$500mn  
  17. 17. contact@industreams.com InduStreams.com & Port-Investor.com What  comes  next?   In  the  next  ar>cle  on  this  topic  we  will  look  at  some  of  the  big  implica>ons  this   development  is  having  on  the  sector.       This  ar>cle  is  part  of  our  “Real  Payoff”  ini>a>ve,  which  you  can  read  more  about   on:     www.industreams.com/real-­‐payoff     We  encourage  anyone  who  wants  to  share  specific  views  or  cases  to  reach  out   and  explore  the  challenges  and  possibili>es  of  this  topic  with  us.  You  can  reach  us   directly  on:     contact@industreams.com    
  18. 18. contact@industreams.com InduStreams.com & Port-Investor.com Disclaimer   This  presentaOon  is  issued  for  informaOon  purposes  only  and  does  not  consOtute  an   agreement,  offer,  obligaOon  or  invitaOon  to  enter  into  transacOons  or  investment   business.       With  this  presentaOon,  INDUSTREAMS  LIMITED  does  not  act  in  any  way  as  your  advisor.   This  presentaOon  is  not  intended  as,  nor  should  it  be,  a  subsOtute  for  consulOng  with   INDUSTREAMS  LIMITED.     Whilst  this  presentaOon  has  been  produced  from  sources  believed  to  be  reliable,  the   informaOon,  views  and  opinions  expressed  in  this  presentaOon  are  provided  as  of  the   date  of  this  presentaOon  and  remain  subject  to  verificaOon,  compleOon  and  change   without  noOce.  No  representaOon  or  warranty  whatsoever  (whether  express  or  implied)   is  or  will  be  made  as  to,  or  in  relaOon  to,  the  accuracy,  reliability  or  completeness  of  the   informaOon  contained  herein  or  in  the  appendices  to  this  presentaOon.     INDUSTREAMS  LIMITED  will  not  be  liable  towards  you  or  any  third  party  for  any  eventual   damage  you  may  incur,  caused  by  the  informaOon  contained  in  this  presentaOon  and  its   appendices.  

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