1st TRI Forum
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Successful launch of the Inaugural TRI Forum
The Transport Research Institute of Edinburgh Napier University (TRI) launched the first TRI forum on the 22nd October at the Hilton Grosvenor Hotel in Edinburgh. The forum, which looked considered the issues of Private Equity Investment in Shipping and Ports, introduced three differing papers, presented by Professor Alf Baird, from TRI; Ricardo Sanchez, of the Economic Commission for Latin America and the Caribbean; and Neil Amner, a maritime specialist and Partner at Biggart Baillie LLP, Solicitors. The meeting was chaired by Gavin Roser, of Pantrak.
Gavin Roser introduced the audience to the area of maritime transport, and the role of Private Equity Finance (PEF), outline the significance of the maritime mode, and the changes to its financing and delivery over time. The introduction was followed by a significant insight provided by Ricardo Sanchez, presenting a joint paper with Gordon Willsmeier of TRI. Ricardo’s paper introduced an international aspect to financing, refereeing on a number of occasions to the development of Port Infrastructure in Latin America. The paper highlighted the significance of PEF in the port sector, and what made the sector of interest to private capital investors. His presentation tracked the number of deals (volume) and rate (value) over time from 2000-2007 demonstrating significant returns (17% in PEF ion ports for the period from 2003 – 2006. This was, in part, due to a new generation of investors, including pension funds, PEF and infrastructure funds seeking to focus on mature and low risk markets with stable cash flow.
Professor Sanchez introduced two hypothesis, a relational Institutional / financial business relationship, based on the operation of funds in branching out; and the second, that the current lack of port capacity brought with it an element of rising prices. Recent years had seen significant (excessive?) liquidity within the PEF sector with a growing interest in ports and increasing resale values. Throughput had universally grown comparing utilisation levels in North America, 66.10%, North Europe 68.10%, and South Europe, 62.70%. Two additional variables, value and volatility were compared in three examples providing a view of the characteristics of port infrastructure assets. Port financing was discussed, detailing the extent for large financial needs compared to constrained public funds, providing conditions for private equity as an attractive alternative. Ricardo provided examples specific to Orient Overseas International, and Carrix Inc.
Professor Baird provided an insight into the changing ownership and move from private investment to equity fund within the shipping fleet. After outlining the significant questions, what private equity funds are and expressing views on the recent changes in financial circumstance, Professor Baird highlighted the PEF as a medium to long-term option. Equity was provided in return for an equity stake, allowing for high levels, upto 30%, return for successful funds. Almost $700bn of PEF were invested globally in 2007, with the vast bulk (71%) in North America.
Professor Baird continued by demonstrating that many PEFs had provided high levels of returns, but this was dependant upon the differing types of funds, with many being seen as safe places for investments (including those in Utilities and infrastructure). A standard operating practice was observed as funds bought in, beefed up a chosen investment and sought to sell out at substantial profit. Windfalls could be large leading to the similar concepts of financial engineering and (Docherty) “Deal Junkies”. Progessor Baird charted the value growth in a number of household names in Shipping including Wightlink, which had moved in value from an initial €160m following the PEF purchase by Cinven, rising to €270m in 2001 at point of sale to the Royal Bank of Scotland, and €350m in 2005 as the PEF MacQuarie Bank bought into the company. Similar examples were given for Condor Ferries (moving from €225m in 2002, to €390m in 2008), Red Funnel, Northlink, Moby, IOM Steam Packet, Grandi Navi Volct, Scandlines, Superfast Ferries, and UN RoRo. Professor Baird also highlighted a number of different approaches, including SNCM, a state owned French operator, and the newly launched Hawaii Superferry, operating a new service to a new market. Scottish operators, including Caledonian MacBrayne offered an interesting model, including (for CALMAC) the potential for PEF involvement from (estimated at) 2010.
Professor Baird concluded that the focus on PEFs in Europe, over the past 7-8 years had focused on established services within protected or semi-protected markets with barriers to entry. That PEFs had tended to pay high prices to acquire ferry lines and had an immediate and intense focus on profits and dividends. PEFs had, however, tended to leave operating issues to the ferry managers and partners. Professor Baird concluded by offering a number of sage thoughts: whether PEFs left lines in better conditions than at purchase, whether better sources of financing may be available, indeed what happens after a global financial crisis?
Neil Amner provided a significant counterpoint, addressing the business case from the financial decision makers view. Neil questioned both the source of funds “where’s the dosh” and the propositions in which OPEF decisions were made.
Private sector investors did not need an absolute certainty of return but an understanding of the risks and internal rates of return which in turn reflected smooth curves of performance - a reliable company. The credit crunch, a current relalisation of toxic debts, would also play o the decision making, with the feeling that recession was a reality, investment decisions became harder as did the estimation of risk. This said, market conditions continued to favour ports and shipping, particularly give the view that banks loved monopolies the port and ship[ping options provided security in investment. Risks and Rewards in the port sector differed, however, with no economic regulator for ports requiring emphasis on due diligence and strength of business case.
Neil continued to offer a detailed summary of impacts of regulation, as well as the significance of hinterland connections, estate ownership and restrictions, using the example of the Crown Estate, grants and legal risk. His conclusion highlighted the areas of particular significance in considering investment both for current application and in terms of those issues beginning to emerge over the horizon.
Full details of the TRI forum series is available on the TRI website, www.tri-napier.org, which also contains presentations for download from this and other activities at TRI.