Pension Funds to Finance Public Infrastructure

Report
MAYORS WATER SUMMIT
Pension Funds as a Possible Source of
Capital for Public Infrastructure
Guest Speakers: Craig Beevers & Thad Wilson
December 8, 2010
DISCLAIMER
The services outlined in this presentation are provided by M3 Capital Partners LLC in the United States, M3 Capital Partners Limited in
the United Kingdom and M3 Capital Partners (HK) Limited in Hong Kong.
This presentation is made on a confidential basis to selected sophisticated institutional investors. It must not be copied or disclosed to
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recommendation is contained in it and it does not take into account the investment objectives, financial situation and particular needs
of any potential investor or issuer.
All investments are subject to significant risks of loss of income and capital. Past performance of particular investments should not be
seen as an indication of future performance, and there is no certainty or guarantee that results comparable to those achieved in the
past can be achieved in the future.
In the United Kingdom this presentation is intended only for investment professionals and high net worth companies, partnerships,
associations or trusts falling within Articles 19 and 49 of the FSMA (Financial Promotion) Order 2005. Firms authorised under the
Financial Services and Markets Act (“FSMA”) may also provide this presentation to persons they have classified as Professional
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This presentation is in Hong Kong only intended for professional investors. The term "professional investor" is as defined in the
Securities and Futures Ordinance and its subsidiary legislation.
M3 Capital Partners LLC is a member of FINRA and SIPC.
M3 Capital Partners Limited is authorized and regulated by the Financial Services Authority.
M3 Capital Partners (HK) Limited is licensed with the Securities and Futures Commission.
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M3 CAPITAL PARTNERS
An Integrated, Global Real Asset Private Equity Investment and Advisory Firm

Since inception in 1991, M3 has focused on real asset private equity
investment and financial advisory services, executing 200+ transactions with a
total capitalization over $80 billion

M3 currently manages two private equity funds aggregating $2.9 billion of
equity through Evergreen Investment Advisors, a wholly owned subsidiary

Global platform with regional offices in Chicago, New York, London and
Hong Kong1

The majority of M3 transactions involve cross-border flows of capital

M3 Principals have average real asset experience of 23 years and average M3
tenure of 15 years

Stability of senior management and a focus on long-term strategic relationships
Focus on Real Asset
Private Equity
Global Presence and
Expertise
Management-Owned with
Long-Term Stability
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Services provided in the United States by M3 Capital Partners LLC, in the United Kingdom by M3 Capital Partners Limited, and in Hong Kong by M3 Capital Partners
(HK) Limited.
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INFRASTRUCTURE OVERVIEW
Why is Private Capital Attracted to Infrastructure Assets?


Due to recent market turmoil and the perceived threat of inflation, private capital is attracted to
tangible infrastructure assets offering:

Low volatility

Predictable cash-flow

Attractive real returns

Low correlation with other asset classes
Attractive features of drinking water and wastewater infrastructure investments:

Capital intensive

Varied sizes ($10  $100+ million)

Very long investment horizon

Stable, secure cash-flows

Monopolistic characteristics

Massive need for investment
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PRIVATE CAPITAL’S APPEAL
Why Should Municipalities be Attracted to Private Capital?
Ownership / Control



If correctly structured, public entity retains control over pricing and regulation
Municipalities can continue to oversee operating and safety standards
Failure to comply to standards results in termination of agreement
Payment


Municipalities can receive direct upfront payment or avoid capital drain
Potential to reinvest proceeds in infrastructure or other public works
Risk Transfer

Construction, operation and maintenance, financial and regulatory risks
transferred to private sector
Social Benefits




Limits need for public entity leverage
Allows for redeployment of stretched municipal human resources
Brings forward time at which projects can be undertaken
Large driver of employment locally and nationally1
Additional Benefits

Private expertise and operational efficiencies may result in long-term user
savings
Allows for potential transfers of new technologies and global best practices
Diversifies funding sources


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Studies cited by Jack Wells, US DOT Chief Economist, have found that each $1 billion in infrastructure investment could generate 34,800 jobs.
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PRIVATE INVESTMENT VEHICLES
Variety of Direct & Indirect Sources of Private Capital
Direct Investment
Secondary Investment

Public Pension Funds

Corporate Pension Funds

Unlisted Funds

Sovereign Wealth Funds

Listed Funds

Insurance Companies

Fund of Funds
Private Equity Funds
Infrastructure Assets
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Listed
Corporates
THE DIRECT APPROACH
Direct Investment by Public Pension Funds
Capital Characteristics


Pension plans are characterized by very long-term liabilities (i.e. retiree
benefits) and thus are natural owners of long life-cycle assets
Pension funds desire better alignment of interests among stakeholders
Capital Availability

Pension plans have increasing in-flows resulting in more flexibility to reinvest
capital and fund future capital expenditures
Investment Horizon




Very long-term investor – strong alignment of interests with focus on whole-life
project costs
Motivated to achieve more cost-effective design and construction
Allows for setting clear performance standards aligned with financial incentives
Permits long-term budgeting
Use of Leverage

Not motivated to leverage asset to meet promote hurdles or “alpha” targets
Return Expectations


Typically more focused on current yield rather than capital appreciation
Lower total fees
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SPECTRUM OF POTENTIAL STRUCTURES
Not a “One Size Fits All” Approach
Public
Ownership
DBO
Investor Perspectives:
DBOF /
Concession
Joint Venture
Private
Ownership
Strengths
Strengths
Strengths

Long-term ownership

Alignment of interest

Ability to optimize
leverage
Coordination of
design, build and
operations process


Control over design,
build and operations
process

Long-term, stable
cash-flow stream

Very long-term cashflow stream
Challenges
Challenges
Challenges

Minority ownership
for investor



Untested structure
Structuring of
financial and
operational risks
Structuring of
financial and
operational risks

Rate setting
mechanism

Getting the contract
terms “right” up front

Political acceptance

Rate setting
mechanism
Example
Example


Potentially structure
similar to Indianapolis
transfer agreement
PERC Water’s Santa
Paula, CA Water
Recycling Facility
Example

Potential Pension Fund
Investment Structures
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Publicly traded
utilities
CONTACT INFORMATION
M3 Capital Partners
www.m3cp.com
150 S. Wacker Drive, 31st Floor
Chicago, IL 60606
Craig Beevers
Direct: 312.499.8500
E-mail: [email protected]
Thad Wilson
Direct: 312.499.8530
E-mail: [email protected]
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