Transcript What is Infrastructure
THE USE OF INVESTMENT FUNDS FOR INFRASTRUCTURE DEVELOPMENT
African Stock Exchange Conference 20 September 2006 ALWAYS THINKING INVESTMENT
2
What is Infrastructure?
What is Infrastructure?
a.
b.
the basic structural foundations of society or enterprises roads, bridges, sewers etc regarded as a country’s economic foundation
3
Source : Concise Oxford Dictionary
4 Infrastructure characteristics
Assets with:
- Essential assets - Long term, predictable cash flows - Low sensitivity to economic cycles - Not subject to competitive markets - Low risk/volatility
5 Infrastructure asset classes
Patronage/Throughput
Patronage dependent Monopolistic elements Demographic factors e.g. roads, airports, railways, car parks and ports
Regulated
Revenue level or tariffs regulated Natural monopoly Basic/essential service e.g. prison, electricity & gas distribution
Social
Essential service, but not monopoly Basic social service provision e.g. hospital, school, government buildings
Competitive
Compete in market for sale of product Volatile returns e.g. certain power pool generators Risk
6 Investment Needs Investment Needs : High risk adjusted returns Diversification Absolute returns Low correlation alternatives Lower risk/volatility alternatives Returns that match liability profiles Balance capital growth with the security of cash yield Downside protection Other Needs : Seen to be contributing to upliftment Social responsibility
7 Different to listed equity, bonds & property
Special Purpose Vehicles Essential Services High Barriers to Entry High Capital Costs/Low Operating Costs/High Financial Leverage High Gearing to Declining Risk Regulated
8
Typical structure
PPP Structures
Actively monitor our investments and engage with management on regular basis. Board representation Interact with Lenders to extract maximum benefit for shareholders Lender Shareholder 1
Shareholders Agreement
Shareholder 2 Primary focus as a Non sponsor equity investor
Loan Agreement
Special Purpose Vehicle (SPV)
Concession Agreement Design and Construct Contract Facilities Manageme nt Contract
Contractor Operator Authority Interact with Authority on behalf of SPV
9
Due diligence on project, assumptions and forecasts Ongoing assessment of performance
Asset Manager actively monitors its investments at various levels to extract maximum benefit for shareholders
10 Optimal risk allocation Risks appropriately allocated to the party that controls it e.g.: Construction risk entirely back to back to D&C contractor Operational risk back to back to O&M contractor Revenue risk with concession company Finance risk with concession company
11
Investment Process
12 Infrastructure Management Process Deal Flow Investor Returns Investment Committee Financial Model Due Diligence Investment Committee Completion Initial Screening Investment Life Cycle Ongoing Management Disposal Restructuring Revaluation Refinancing
13 Active management Management Asset management intensive Big stakes, few investments Often Concessions held by SPV i.e. influence brings obligations Understanding the asset class Few qualified asset managers Constant search of economic value add Valuation management and continuity Cross pollination of best practice (non-competitive) Government agency interaction Deal Flow Securing pipeline
14
Listed Infrastructure
15
Infrastructure index
Constitution of index: All companies in Euro Top 300 Index with greater than 50% exposure to pure infrastructure were selected Separate infrastructure index was created using these companies Comparisons run to ther indexes
Listed Infrastructure Companies in Euro Top 300 Index 100% 80% Companies not included in Index 60% 40% 20% 0% Companies included in Infrastructure Index 16
Source: Based on broker ‘sum of parts valuations’ and Macquarie infrastructure definition
Correlation of Infrastructure Index compared to other Indices 0.4
0.2
0.0
1.0
0.8
0.6
17
Source: Dow Jones STOXX website; indexes are based on total return data
Standard Deviation of Infrastructure Index compared to other Indices 18
Source: Dow Jones STOXX website; indexes are based on total return data
19
Valuation
Risk and Capital Growth Project Life 20 Project Life Greenfield Risks: Legal, Environmental & Regulatory Risk Premium 9% - 12% Construction Risks: Construction Risk Premium 8% – 10% Ramp Up Risks: Ramp Up Rate, Natural Traffic Level Risk Premium 6.5% - 8% Growth Risks: Impacts on Traffic Risk Premium 5.5% – 6.5% Note: risk premium over risk free rate ( eg R153)
Source : African Infrastructure Investment Managers
Mature Risks: Major population shift Risk Premium 4% – 5.5%
21 Refreshing Concessions
SAIF
Revaluation exceeds cash available Cash distribution exceeds revaluation End of Concession
22
Other benefits
23 Other benefits Basis for a globally competitive economy Stimulates stronger economic growth -
1% increase in infrastructure stock = 1% increase in GDP
Redistribution of State Spending Generates new jobs Increases economic productivity Alleviates Poverty
24 Why Infrastructure
Government objectives: -
Reduce public sector borrowing & cost Operational efficiencies of private sector Focus on user benefits & service delivery Speed up infrastructure development Optimal risk allocation between public and private sector
25
Conclusion
26 Investor appetite Institutional appetite has broadened and deepened Initially through private equity funds or direct private investments Critical mass build-up Public listing – international precedent for both listed funds and direct investments Asset class diversification Liquidity
27 Government role
Government vital to future of asset class
Will and competence
Stability of policy
Public entities with track record
Private sector efficiencies
28
Regulatory Information
Old Mutual Asset Managers (South Africa) (Pty) Ltd
Physical Address: Mutualpark Jan Smuts Drive Pinelands 7405 Telephone number: +27 21 5095082 (Mike van Heerden) Internet website: www.omam.com
Old Mutual Asset Managers (South Africa) (Pty) Ltd (“OMAM (SA)”) is a licensed discretionary financial services provider approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisors and Intermediary Services Act 37 of 2002. OMAM (SA) is a wholly owned subsidiary of Old Mutual South Africa Limited.
Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuate, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.
All returns are rand returns, unless otherwise stated.
Investment deals done on behalf of clients with a company in the Old Mutual Group are all done on an arms length basis.