Shaping partnerships to reduce risk of port investments
WSP’s Johan-Paul Verschuure & Andrew Penfold ask if consortiums are the new development model
Ownership of port infrastructure is becoming more and more complicated. Shipping lines have built up port terminal portfolios to secure port handling capacity, while private equity and pension funds are eyeing port infrastructure for their stable return profiles and inflation hedge characteristics.
At the same time, port operators keep expanding their portfolios, benefitting from economies of scale and implementing efficient practices. Infrastructure developers and contractors are looking for new business models to secure future work and edging towards equity positions in terminals. All parties are targeting port concessions, but each from their own angle.
Going it alone, however, has become less and less the favoured option. Forming consortia seems to be the new reality for port ownership – the ideal route to either secure profitability or reduce the risk profile.
Everyone following the maritime sector knows the industry is in challenging waters. Intrinsic industry forces as well as wider economic pressures are squeezing port assets and financing models. Demand growth has been lower than hoped and with unfavourable geopolitical developments, future trade growth has become uncertain.
The industry itself is also facing changing dynamics. Larger vessels are putting pressure on port infrastructure and shipping line consolidation results in fewer – much bigger – client groups. The investment case in ports faces pressure from both uncertain income as well as higher risks. We are nowhere near the end of this phase of development.
As a consequence, demand for investing in port assets has changed, with much more scrutiny of the investment case in order to reduce the risk of unpleasant surprises. The key drivers of the business case have to be understood in detail to obtain financing. A marginal business case will no longer be assumed to be saved by natural demand growth. Also, conditions in the market seem less supportive of greenfield developments and are more focused on squeezing more capacity out of the current terminals.
Investors that are still looking for the investment gems in the port sector must now direct their attention to peripheral markets and/or non-conventional cargoes – markets which present a higher risk profile to most investors. All these trends point in one direction: careful market assessments are required before investing in a terminal.
The most logical way to cope with this changing investment dynamic is the shaping of partnerships for port infrastructure to reduce the risk. Consortia of port operators, shipping lines, financial investors and (potentially) infrastructure investors can lead to less risky business cases and, hence, potentially realising what was not possible by each party acting alone. Recent examples of this increased co-operation include DP World divesting part of its stake in its Canadian terminals to a Canadian pension fund, or Cosco Shipping taking a stake in the Euromax terminal in Rotterdam. In addition, portfolio level cross-holdings between different types of investors is gaining momentum with, for example, MSC selling part of its terminal operating branch to GIP. We expect this to pick up further momentum as long as the market conditions remain as they are.
Each type of investor has its core competences to bring to the table when dealing with port transactions: Port operators offer unrivalled experience in operating terminals; shipping lines can ensure cargo volumes to the terminals; and financial investors can add access to competitively priced financing and bring their business experience to the consortium. Consortia can combine these benefits and thereby optimise the risk-return profile of the port investment.
Of course, there are profound challenges in shaping these consortia. First of all, the co-ordination of consortia will require much effort to align the investment partners. Each investor type will look at the investment from their point of view and from the limitations they may face. For example, shipping lines currently have limited financial means to expand their portfolios and are primarily seeking to raise cash through divesting part of their portfolios. Financial investors may have limited market knowledge of the particular market the asset is in. Port operators may not have the balance sheet to invest in all assets or (usually) will not be able to directly bring the volumes to secure favourable debt financing.
A consortium should be able to overcome these shortcomings. However, a clear, jointly defined business case is needed to bridge the gaps in understanding of the asset between the three groups. Of course, in the current port and shipping environment this means more careful-than-ever due diligence.
These cross-investor type consortia come in two main types: consortia shaped at the moment of transaction or tender, or consortia formed after initial ownership of the equity which is then divested to another type of investor. The number of deals where parties go in jointly at the outset is relatively limited. Co-ordination problems during the tense and short transaction or tender periods are the primary cause of this. The second type of consortia development is the most common in the port industry at present.
To investigate this process in the port sector, we analysed our port transaction database and looked at 121 port transactions between 2012 and the first quarter of 2017, determining which of the two types of consortia-forming was utilised. From our analysis, it was apparent that an increasing share of port transactions involved transactions from which consortia were formed. Between 2012 and 2017 the share of consortia transactions increased, but in a breakdown the trend between 2012 and 2014 steadily accelerated only to halt in 2015 to 2016. This was however, mainly due to the large total number of port transactions in that year. Various port assets changed ownership among shipping lines as a result of lines getting into financial distress and who were forced to divest the full ownership of the terminals.
This resulted in a relatively large number of non-consortium transactions taking place in 2016. The absolute number of consortia transactions has since reached new heights. In 2017, the share has remained stable around the same level as in 2016 but in our expectation the number of consortia deals will pick up in the second half of the year.
In the current market conditions, forming consortia of different types of port investors may well be the key to realising new port infrastructure. By combining the operating expertise of port operators, volumes from shipping lines and the business skill set of financial investors income may be optimised while the risks of the investment are reduced. This trend has been visible over the last few years and in current market environment this is expected to continue.
However, forming a successful consortium requires a clearly defined, joint business case to be established. The interests of each consortia member need to be aligned in terms of investment horizon, scale of investment, type of asset, and risk profile of the country in which the terminal is located. Also, each consortium partner needs to understand why each party is in the consortium in the first place and how they view the business case. Careful due diligence is crucial if consortia are to ensure that all partners are sailing off in the same direction.
WSP’s Johan-Paul Verschuure & Andrew Penfold
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