Change of approach to investment needed
New analysis on infrastructure and pension fund investment in container terminals has found this has plateaued but opportunities for growth remain with a change in the approach to investment.
Drewry’s spotlight analysis in its latest container ports webinar briefing explained that 2019 was a peak year for terminal M&A activity, but analysis of the deals shows that the market is fundamentally different to the previous peak in 2006-7, before the 2008 economic crisis.
“The playing field has levelled up,” said Eleanor Hadland, senior analyst, ports and terminals at the maritime research consultancy. “Valuations have shifted back to more reasonable levels in recent years, and in this era of slower growth, operators have shown an increased appetite for brownfield assets over development of potentially higher risk greenfield projects.”
More deals worldwide
The geographic focus has broadened, with more deals in Europe, Australia and selected emerging markets.
The initial boom centred on North America, where there was relativity high number of privately owned operators willing and able to sell in the early 2000s.
By the end of 2008 funds had invested around GB£10bn in the market and achieved a 38% share of regional container volumes, but by 2019 this had only risen to just over 40%.
Alongside this slowdown, a notable feature of deals in recent years is that some of the assets that were previously owned by funds have now been sold back into industry ownership.
“Larger terminals of the east coast and Gulf coast have remained under the ownership of state-owned port authorities and elsewhere there are no large privately owned terminals which are not already owned by a fund or a global container operator,” said Ms Hadland.
“On the US west coast there are only four terminals left under 100% control of shipping lines,” she added.
Drewry believes that the funds market share may grow a minimal amount, but the North American market is at or close to its upper limit in terms of infrastructure fund investment.
Infrastructure and pensions fund only hold around a 6% share of the global market, in contrast to the 65% market share of the global operators.
Terminal ownership structure is a key constraint to further market penetration by funds across other regional markets. In Europe, the global operators market share stood at almost 80% in 2019.
There are few remaining suitable acquisition targets, especially for the larger cap funds, said Ms Hadland.
For funds to increase their share of the global container market, there needs to be a shift in the approach to investment, but there are some early signs of this already, explained Ms Hadland.
Going forward, there could be a further dilution of equity shareholding in terminal assets by shipping lines, possibly with sales to existing partners. However, there are limited remaining assets in the target markets which aren’t already under some kind of joint ownership structure.
Secondly, funds may focus on acquiring privately operated terminals in selected emerging markets with stable economies and established port concession regimes. There are examples of where this has already happened.
The largest opportunity is the further development of the co-investment model. The primary example of this is the DP World and CDPQ port investment platform. It has enabled DP World to monetise existing assets and fund new acquisitions. CDPQ has enhanced access to the market. CDPQ has been able to access deals that wouldn’t have been considered by the fund on a standalone basis.
Looking at activity in Q2 2020 overall, the rolling four-quarter average measure of global port handling is -2.3%. The rate of port development is also going to slow by at least 40% compared to the previous decade.
On the plus side, Chinese port throughput levels are back to 2019 levels as of June; and there is an increase in co-investment between funds and industry operators on the rise, in particular in relation to M&A activity.
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