Bigger ships, slow U.S. economy will cool equity funds terminal buys

Expect the purchases of marine terminals by infrastructure equity fund investors to slow somewhat this year, as fund managers take stock of the changing dynamics in container trade.

That was the message from Laurie Mahon, senior vice president and principal consult of PB Consult, who helped orchestrate the sale of Orient Overseas (International) Ltd.'s North American terminals to the Ontario Teachers' Pension Plan, and is now advising the Panama Canal Authority on its expansion.

Speaking at TOC Asia 2008 in Shanghai, Mahon said infrastructure fund managers are assessing how larger classes of vessels and the U.S. economic downturn may change the economic performance and value of container terminals in the short- and long-term.

The market has been split by two types of investors, she said. There are those that buy and hold and those who reorganize and split up and leverage. These investors clean up the books, buy another asset, marry the two, then release equity back out into the market, so they're reduced their equity stake but made that remaining stake more profitable (i.e. Australia's Macquarie).

acquarie is successful in part because Australia, where they raise their equity, only expects returns of 2 to 3 percent, which is pretty low for the rest of the world. Macquarie doesn't even participate in bidding wars. They go set up private deals in less high-profile sales. Mahon said the Ontario teachers' sale is the other side of the coin.

The Ontario teachers find this investment perfect, she said. It hit the sweet spot for them between energy and more retail-oriented investment. They said our investment has to last until the last teacher in Ontario dies. As investing in marine terminals becomes more sophisticated and banks become less willing to lend huge amounts of money, investors will decide whether they want to pay more for established facilities or less for terminals that might be considered gambles, she added.

The market will begin to striate itself,?Mahon said. To get those that would pay top dollar for really established terminals, like if the Port of L.A. was ever opened up to private investors. (Private investors) don't like risk, they don't like greenfield facilities, and they don't like environmental risk, like in new projects in U.S. ports. Four years to permit a terminal means four years of zero returns. That hurts over a 15-year horizon. It means you need to have 30 percent returns over the rest of the period.

Investors like the marine terminal business because it's mostly recession-proof, but that also affects how they choose markets. They like terminals with more (import/export) cargo because transshipment can pack up and leave. They like bigger markets over smaller ones and they like terminals with established logistics links. But aside from the issue of larger vessels, the coming U.S. recession will have global banks less willing to dole out money to funds that want to invest in terminals, meaning funds will have to pay for any purchases with more equity and less debt, driving prices down.

Ranks and equity funds are getting a little nervous about demand forecasts versus when they made their first projections,she said. The average U.S. household spends 75 percent of its income on personal consumption (which doesn't include spending on housing or savings). That has to level off at some point.

Source: American Shipper