Post-crisis investing: How global investors employ new models

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InduStreams.com & Port-Investor.com
POST-‐CRISIS
INVESTING:

HOW
HUTCHISON
AND
OTHERS
EMPLOY
NEW
MODELS

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.

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.

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.

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).

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

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

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?

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

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

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))

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.

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.

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).

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.

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

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:


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presentaOon
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issued
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informaOon
purposes
only
and
does
not
consOtute
an

agreement,
oﬀer,
obligaOon
or
invitaOon
to
enter
into
transacOons
or
investment

business.

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Post-crisis investing: How global investors employ new models

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