presented by robert longfield july 14, 2010 investing in infrastructure
TRANSCRIPT
Presented by Robert LongfieldJuly 14, 2010
Investing in Infrastructure
Disclaimer• This presentation has been prepared from sources and data believed to be
reliable; however, no representations are made as to the accuracy or completeness thereof. Consulting Services Group, LLC is not responsible for errors and omissions in any of the information in the presentation obtained from external sources.
• The strategies displayed in this presentation are non-traditional approaches to investing and may contain a great deal of risk.
• Past performance is not indicative of future success.
• This presentation is neither an offer to sell nor a solicitation to invest in any security or investment fund as any decision to invest should be made only after a careful review of the current offering memorandum of the relevant security or investment fund.
Why Consider Alternatives
Source: Barron’s
Alternative Asset Classes Private Equity
Hedge Funds
Commodities
Private Real Estate
Private Infrastructure
Timber
Distressed Debt
Characteristics
Private Infrastructure Investing
What is Infrastructure?
Essential facilities and services, upon which the economic productivity of a community depends
Assets involved in the movement of goods, people, water and energy
Transportation AssetsTransportation Assets Communications AssetsCommunications Assets Regulated AssetsRegulated Assets Social InfrastructureSocial Infrastructure
Bridges and tunnels Radio/TV broadcast towers Electricity transmission Schools
Toll roads Wireless towers Oil and gas pipelines Hospitals
Railroads Cable systems Electricity and gas distribution Prisons
Rapid transit links Satellite networks Water distribution Courthouses
Airports, Seaports Waste water collection and processing systems
Infrastructure Defined
Strong Need for Capital InvestmentCharacteristics
The 30 member countries of the OECD are expected to spend in excess of $500-600 billion annually on electricity, road, rail and water infrastructure over the next 25 years1
Power-sector infrastructure improvements in OECD countries will require almost $4 trillion over the next 30 years2
If population and mobility trends continue for the next 30 years, the U.S. and Europe must at least triple their transportation infrastructure to meet congestion levels of the 1970s3
500 million gallons of water was leaking daily from old and rotted pipes during London’s 2006 drought4
50 million people lost power, 4 million people lost water, many railroads and airports were shut down after the 2003 Northeast U.S. power outage caused by aging transmission lines5
Over the next 25 years, modernizing and expanding water, electricity and transportation systems in the U.S., Canada and Western Europe alone will require approximately $16 trillion6
The American Society of Civil Engineers annual report card gave failing grades for U.S. airports, energy, and roads7
$9.4 billion per year for 20 years is required to eliminate bridge deficiencies
$11 billion annual shortfall to replace aging water facilities, comply with water safety regulations
1 OECD Study 2006. 2,4,5,6 Booz Allen Hamilton, Strategy + Business, issue 46, Spring 2007. 3 The Boston Consulting Group, “The China Rip Tide: Threat or Opportunity: Profiting from the Growing Supply-Chain Bottleneck”, June 2006. 7 American Society of Civil Engineers, Report Card for America’s Infrastructure, 2005.
Predictable Cash FlowPredictable Cash Flow
DiversificationDiversification
Return ProfileReturn Profile
Leverage and LiquidityLeverage and Liquidity
Portfolio ManagementPortfolio Management
Long-term assets with low risk of obsolescence Frequently have relatively low operating risk and operating costs Inelastic user demand
Infrastructure is a real return asset, comparable to real estate Low correlation of returns to equity and fixed income Diversification relative to real estate, timber, commodities
Typically have stable returns and potential for growing cash flow Majority of return from cash yield, with opportunity for modest
capital appreciation Premium returns may be available to early investors
Debt ranges from 50% to 85% of total capital Secondary market exists but less liquid than real estate Liquidity trade-off: cash flow profile vs. capital appreciation
Attractive alternative to long-term fixed income Favorable risk-adjusted returns relative to equity Inflation-protection, demographic-hedging characteristics
Characteristics of Core Plus Infrastructure Investments
Common Traits of Various Sub-sectors Monopoly
Inelastic Demand
Stable Cash Returns
Long Duration
Inflation Hedge
Hybrid Asset
Characteristics
Risk SpectrumCharacteristics
Core and Core Plus Value-Added OpportunisticBridges, tunnels, toll roads Airports, seaports Development projects
Pipelines, energy transmission Rail links Satellite networksand distribution
Contracted power generation Merchant power generation
Water and waste-water systems Rapid rail transit Non-OECD country infrastructure
Less riskLess returnLess riskLess return
More riskMore returnMore riskMore return
Source: JPMorgan Asset Management
Comparison of a fixed bond coupon and concession project cash flows
A coupon for a fixed rate bond is constant, without inflation-protection characteristics Cash flows for an infrastructure concession, however, are not fixed and rise through a combination of increased
usage and adjustment for inflation
Years
9
11
1315
17
1921
23
2527
$29
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Toll / rate increases = 2% p.a.Traffic / population growth = 1.5% p.a.Bond coupon
*Note: assumes principal of $100. This illustration is meant to show nominal cash flow over a 30-year period, and does not take into account the principal repayment of the bond in year 30. The chart also does not take into account the assumed zero residual value of the infrastructure concession.
*
Inflation Protection
Source: JPMorgan Asset Management
Interest Rate Hedge We have compared changes in the value of infrastructure assets to the value of a long-term fixed-rate bond in
response to changes in interest rates a 30-yr bond shows duration of approximately 15, i.e., a 1% change in yield will result in a 15% change in price
Contrary to a fixed coupon bond, infrastructure assets with cash flows that adjust for inflation will have a duration approaching zero or even negative duration, allowing them to maintain (or increase in) value
Factors other than interest rate changes influence the value of infrastructure investments
Interest rate change
Price indexImpact of changes in interest rates on valuation
Unique risks (and mitigating factors) Regulatory risk (due diligence and transparent regulatory process)
Political risk (non-monopoly assets, labor support, enforceable contracts, commercial law)
Liability issues (insurance and appropriate risk allocation among stakeholders)
Legal
Leverage
Liquidity
Varying sub-sector risks along a spectrum from operating toll roads, water/gas distribution,
airports through to development (similar to real estate)
Construction Risks
An emerging investment strategy: inefficiencies, lacking robust data
Risks
Due Diligence ProcessCharacteristics
Coming to Market
~3 - 5 Funds
Criteria IdentifiedCharacteristics
Team Individual ExperienceTeam ExperienceInvestment CommitteeOther Advisors/Consultants
•StrategyAsset Allocation
oGeography/RegionoSectoroLife Cycle StageoCurrency
Sources of ReturnLimitations
•Investment ProcessSourcing Investments
oPipeline – Who & how comp.?oValuation Process
Due DiligenceoBrief Overview & typical timelineoWho is involved in this process?
Investment Decision oWho & How?
Asset ManagementCapital Structuring/Restructuring
oHow & Where (Capital Markets)Potential Exit StrategiesIs there a track record?
Risk ManagementoConflicts of InterestoMitigation ToolsoPoliticaloOperationaloCorporate & Fund GovernanceoConstruction & Development
•Fund Structure/TermsTarget SizeOpen vs. ClosedLeverage# of investmentsTarget IRRTerm/Fund Life (Extensions)Fees (Mgmt/Carried/acquisition/etc)
•Firm ProfileAUMHistory
•Other Important CriteriaCoinvestment opportunities Investor ReportingAsset/Case Study (Accepted & Declined)Unique Risks & Competitive AdvantagesLegal & Audit
Consulting Services Group, LLCRobert A. Longfield, Jr., CFA
– Robert is a principal in the firm and has been employed at CSG since 1989. He in a senior institutional consultant and is the chairman of the firm’s Research Advisory Board.
Consulting Services Group, LLC– The founding principals of CSG have been together since 1988
and CSG itself was formed in 1990. The firm consults to over 65 clients representing $21 billion in assets across the country with 48 employees. In addition to large institutional retirement plans, endowments, and foundations; they assist clients with insurance reserves, hospital operating assets, and investment product design for financial institutions.
Consulting Services Group, LLC Consulting Services Group, LLC (CSG) is an investment adviser that is registered with the Securities and
Exchange Commission (SEC) under the Investment Advisers Act of 1940. Commerce Square Trading, LLC (CST) is a broker-dealer that offers investment products and services and is a member of FINRA and SIPC. InterSec Research, LLC (InterSec) is a research consulting firm. Commerce Advisors, LLC (CA) is an investment adviser that is registered with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. CA is wholly owned by Commerce Holdings, LLC. CSG Fund Management, LLC (CSGFM) is an affiliated entity formed by CSG Holdings, LLC to provide investment management services in respect of various types of investments. CSGFM owns 85% of Quantitative Alternative Management, LLC (QAM). QAM was formed by CSGFM to provide investment management services in respect of various types of alternative investment replication products. Consulting Services Group, LLC, Commerce Holdings, LLC (parent company of related investment adviser, Commerce Advisors, LLC), Commerce Square Trading, LLC, CSG Fund Management, LLC and InterSec Research, LLC are each wholly-owned by CSG Holdings, LLC.
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