- Executives will be increasingly measured on limiting downside risk and increasing upside potential of investments, rather than just focusing on average or expected returns.
- Performance will be assessed based on three models: the investment model looking at overall project returns, the operating model looking at short-term margins/profits, and the ownership model looking at long-term shareholder returns.
- There is a trend for shareholders to pay more attention to balancing performance across all three models, rather than just focusing on one, due to increased volatility experienced in the financial crisis. Executives will need to demonstrate comprehensive management of risk and return across the investment, operating, and ownership aspects of portfolios.
2. contact@industreams.com
InduStreams.com & Port-Investor.com
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.
3. contact@industreams.com
InduStreams.com & Port-Investor.com
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).
4. contact@industreams.com
InduStreams.com & Port-Investor.com
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).
5. contact@industreams.com
InduStreams.com & Port-Investor.com
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).
6. contact@industreams.com
InduStreams.com & Port-Investor.com
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.
7. contact@industreams.com
InduStreams.com & Port-Investor.com
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))
8. contact@industreams.com
InduStreams.com & Port-Investor.com
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!
9. contact@industreams.com
InduStreams.com & Port-Investor.com
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:
contact@industreams.com
10. contact@industreams.com
InduStreams.com & Port-Investor.com
Disclaimer
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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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LIMITED
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in
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This
presentaFon
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nor
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LIMITED.
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appendices
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