Post-crisis Performance

contact@industreams.com
InduStreams.com & Port-Investor.com
POST-‐CRISIS:

HOW
EXECUTIVES
WILL
BE
MEASURED

Introduc=on

In
our
last
presenta-on
we
discussed
how
the
leaders
in
the

industry
are
changing
the
way
they
invest
and
manage
their

investments:

www.port-‐investor.com/post-‐crisis-‐inves-ng

In
this
presenta-on
we
explore
how
the
metrics
to
measure

success
is
changing
and
how
it
is
going
to
impact
the
way
port

execu-ves
are
appraised
and
maybe
one
day
how
they
are

remunerated.

How
your
goal
is
changing

The
crisis
brought
with
it
clear
evidence
of
substan-ally
more
vola-lity
than
was

previously
conceived
possible.
With
that
we
are
seeing
how
some
of
the
best
in
the
market

are
changing
the
goal
metrics.

The
main
focus
point
has
previously
been,
and
for
many
s-ll
is,
one
figure
or
a
base
case

around
which
decisions
were
made
and
expecta-ons
to
management
performance
were

formed.
But
with
the,
in
many
cases,
nega-ve
and,
in
some
cases,
posi-ve
surprises

investors
have
had
we
expect,
and
already
see,
a
change.

Specifically
we
start
seeing
much
more
focus
on
poten-al
downside
and
upside.

That
changes
the
game.
It
is
increasingly
becoming
about
altering
the
en2re
return

profile
by
limi2ng
downside
and
increasing
upside
(and
very
much
the
rela-on
between

the
two).

As
example
an
investment
yielding
a
total
expected
NPV
of
$125mn
may
be
entrusted
to

you
or
a
management
team
of
which
you
are
part
to
deliver
on
for
a
given
number
of

years
(see
next
slide).

How
your
goal
is
changing
(2)

If
the
investment
changes

from
Scenario
0
to
Scenario
1

during
your
tenure
you
have

failed.
This
is
oPen
seen
in

incremental
investments

where
a
set
of
assump-ons

make
decision-‐makers
blind

to
the
dispropor-on
between

incremental
downside
and

upside
(as
example
when

automa-ng
a
yard

opera-on).

But
if
you
have
changed

payoﬀ
exposure
from

Scenario
0
to
Scenario
2,

then,
despite
not
having

added
addi-onal
upside,
you

have
performed
much
beRer.

Another
way
to
look
at
it
would
be
that
rather
than
focusing
on
the

average
or
the
“expected”
payoﬀ
point,
the
return
range
is
used
to
drive

the
average
upwards
(as
illustrated
above
from
e.g.
Scenario
0
to
Scenario

where
the
average
has
changed
by
$100mn).

Breaking
it
down
in
models

We
see
three
key
focus
areas

or
models
that
performance
is

being
assessed
on
(explicitly

or
implicitly).
See
below

diagram
and
associated

descrip-on
for
explana-on.

Investment
Opera=ng
Ownership

Concerning
everything
that
relates
to

the
scope,
footprint,
design,

investment,
obligaFons
and
enFtlement

that
create
the
frame
for
the
terminal
to

operate
in
the
market.
Consequently

the
investment
model
also
concerns

itself
with
the
enFre
investment
period

(e.g.
the
full
concession
period)
and

project
return
is
oIen
used
to
assess

performance.

With
the
given
frame
of
the
investment

model
the
operaFng
model
concerns

the
actual
usage
and
deployment
of

shorter
term
resources
to
operate
and

provide
services.
The
horizon
is
a
single

Fme
period
or
a
few
at
most
and

performance
measure
used
oIen

annual
margins
or
proﬁt.

Pertains
to
the
individual
shareholders

and
how
they
each
derive
their
returns

from
the
shareholding
in
the
project
or

terminal
company
through
the

combinaFon
of
the
investment
and

operaFng
models.
Long
term
the

performance
metrics
used
is
of
course

the
returns
to
the
shareholder
for
the

enFre
investment
period
and
short
term

annual
proceeds
(e.g.
dividends).

Breaking
it
down
in
models
(2)

How
much
emphasis
the
different
investors
and
operators
put
on
each
varies
much.
As

example
APM
Terminals
seem
to
obsess
about
the
opera-ng
model,
whereas
an
operator

like
Hutchison
seems
more
concerned
with
the
investment
model
and
ownership
model

and
private
equity
funds
all
obsess
about
the
ownership
model.

However
the
trend
we
see
is
that
it
is
becoming
increasingly
difficult
for
shareholders
to

ignore
the
one
or
the
other
because
of
the
vola-lity
they
have
experienced
during
the

crisis.
All
levers
than
can
be
should
be
used
to
shape
shareholder
return.

Consequently
you
should
expect
a
much
more
comprehensive
approach
in
the
future
if

you
are
an
execu-ve
or
team
of
execu-ves
responsible
for
terminal
asset/s.

Likewise
we
expect
the
goal
metrics
to
change
in
a
similar
manner
for
all
these
various

models
as
explained
above
(focusing
on
elimina-ng
downside
and
crea-ng
upside).

As
example
most
terminal
MD’s
and
execu-ves
are
today
measured
in
some
form
on

actual
annual
profits
(and
associated
drivers).
But
in
vola2le
market
condi2ons
a
great

terminal
MD
is
one
who
can
limit
downside
when
volumes
slump
and
capture
upside

when
markets
are
good,
not
someone
who
sub-‐op-mizes
around
some
single
point

predic-on.

Two
domains:
One
forgiving,
one
merciless!

In
the
previous
ar-cle
we

explored
how
returns

(whether
from
single
or

mul-ple
-me
periods)
can
be

considered
derived
from

market
drivers
and
the

models
you
employ.
Or
in

other
words
how
market

drivers
or
variables,
x,
are

turned
into
returns,
“y”,

through
the
models

employed,
“f(x)”.

We
also
discussed
how

market
drivers
of
course
at

best
can
be
impacted,
but

models
in
principle
in
full

control
of
the
investor
in

ques-on.

We
expect
this
trend
to
mean
that
model
mistakes
made

by
execu-ves
(as
example
big
downside
exposures
traded

oﬀ
for
small
upsides)
to
be
judged
more
harshly
than

when
market
drivers
do
not
shape
up
as
expected.

Market
drivers
(or
x)

Return
(or
y)

Models
(or f(x))

Brace
yourselves
for
the
stress
test!

When
you
experience
a
period
of
seemingly
stable
condiFons
it
is

natural
to
get
lazy
and
stop
preparing
for
hard
Fmes.
Likewise
in
good

Fmes,
foregoing
addiFonal
upside
might
be
easier
to
get
away
with

than
when
volumes
are
down.

We
think
this
will
increasingly
become
a
thing
of
the
past.

And
whereas

you
cannot
predict
the
future
it
is
very
easy
to
test
your
up-‐
and

downside
exposure
by
simulaFng
a
spectrum
of
volume
and
rate

scenarios.

Stress
tests
from
shareholders,
head
quarter
or
regional
oﬃces
are

going
to
come
and
we
think
they
are
going
to
be
tough.

The
best
you
can
do
is
to
get
ﬁt!

What
comes
next?

We
will
conFnue
to
explore
aspects
of
our
“Real
Payoff”

iniFaFve,
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
possibiliFes
of
this

topic
with
us.
You
can
reach
us
directly
on:


Disclaimer

This
presentaFon
is
issued
for
informaFon
purposes
only
and
does
not
consFtute
an

agreement,
oﬀer,
obligaFon
or
invitaFon
to
enter
into
transacFons
or
investment

business.

With
this
presentaFon,
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presentaFon
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Whilst
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presentaFon
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informaFon
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appendices
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presentaFon.

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LIMITED
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party
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damage
you
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appendices.

Post-crisis Performance

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