ALWAYS
THINKING
INVESTMENT
THE USE OF INVESTMENT FUNDS
FOR
INFRASTRUCTURE DEVELOPMENT
African Stock Exchange Conference
20 September 2006
What is Infrastructure?
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What is Infrastructure?
a.
the basic structural foundations of society
or enterprises
b.
roads, bridges, sewers etc regarded as a
country’s economic foundation
Source : Concise Oxford Dictionary
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Infrastructure characteristics

Assets with:
- Essential assets
- Long term, predictable cash flows
- Low sensitivity to economic cycles
- Not subject to competitive markets
- Low risk/volatility
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Infrastructure asset classes
Return








Patronage/Throughput
Patronage dependent
Monopolistic elements
Demographic factors
e.g. roads, airports,
railways, car parks and
ports
Social
 Essential service, but
not monopoly
 Basic social service
provision
 e.g. hospital, school,
government buildings
Regulated
Revenue level or tariffs
regulated
Natural monopoly
Basic/essential service
e.g. prison, electricity
& gas distribution
Competitive
 Compete in market for
sale of product
 Volatile returns
 e.g. certain power pool
generators
Risk
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Investment Needs


Investment Needs :
-
Diversification
Absolute returns
Low correlation alternatives
Lower risk/volatility alternatives
Returns that match liability profiles
Balance capital growth with the security of cash yield
Downside protection
Other Needs :
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High risk adjusted returns
Seen to be contributing to upliftment
Social responsibility
Different to listed equity, bonds
& property
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
Special Purpose Vehicles

Essential Services

High Barriers to Entry

High Capital Costs/Low Operating
Costs/High Financial Leverage

High Gearing to Declining Risk

Regulated
Typical structure
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PPP Structures
Actively monitor our
investments and
engage with
management on
regular basis. Board
representation
Lender
Interact with
Lenders to extract
maximum benefit
for shareholders
Shareholder 1
Shareholder 2
Primary focus as
a Non sponsor
equity investor
Loan
Agreement
Design and
Construct
Contract
Contractor
Due diligence
on project,
assumptions
and forecasts
Shareholders Agreement
Special Purpose Vehicle
(SPV)
Concession
Agreement
Facilities
Manageme
nt Contract
Authority
Interact with
Authority on
behalf of SPV
Operator
Ongoing
assessment of
performance
Asset Manager actively monitors its investments at various levels to extract maximum benefit for
shareholders
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Optimal risk allocation
Risks appropriately allocated to the party that controls it
e.g.:
 Construction risk entirely back to back to D&C
contractor
 Operational risk back to back to O&M contractor
 Revenue risk with concession company
 Finance risk with concession company
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Investment Process
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Infrastructure Management Process
Investment Committee
Financial Model
Deal Flow
Due Diligence
Completion
Initial Screening
Investment
Investor Returns
Disposal
Investment
Committee
Ongoing Management
Life Cycle
Restructuring
Revaluation
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Refinancing
Active management
 Management
- Asset management intensive
- Big stakes, few investments
- Often Concessions held by SPV i.e. influence brings
obligations
 Understanding the asset class
- Few qualified asset managers
- Constant search of economic value add
- Valuation management and continuity
- Cross pollination of best practice (non-competitive)
- Government agency interaction
 Deal Flow
- Securing pipeline
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Listed Infrastructure
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Infrastructure index

Constitution of index:
- All companies in Euro Top 300 Index with
greater than 50% exposure to pure
infrastructure were selected
- Separate infrastructure index was created
using these companies
- Comparisons run to ther indexes
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Listed Infrastructure Companies in Euro
Top 300 Index
100%
Companies not
included in Index
Companies included in Infrastructure Index
Infrastructure Exposure
80%
60%
40%
20%
0%
Source: Based on broker ‘sum of parts valuations’ and Macquarie infrastructure definition
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Correlation of Infrastructure Index
compared to other Indices
1.0
0.8
0.6
0.4
0.2
0.0
Source: Dow Jones STOXX website; indexes are based on total return data
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Standard Deviation of Infrastructure
Index compared to other Indices
50%
40%
30%
20%
10%
0%
Source: Dow Jones STOXX website; indexes are based on total return data
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Valuation
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Asset Value
Risk and Capital Growth
Risk Level
Project Life
Project Life
Greenfield
Risks: Legal,
Environmental &
Regulatory
Risk Premium
9% - 12%
Construction
Risks: Construction
Ramp Up
Risks: Ramp Up Rate,
Natural Traffic Level
Growth
Risks: Impacts on
Traffic
Mature
Risks: Major
population shift
Risk Premium
8% – 10%
Risk Premium
6.5% - 8%
Risk Premium
5.5% – 6.5%
Risk Premium
4% – 5.5%
Note: risk premium over risk free rate ( eg R153)
Source : African Infrastructure Investment Managers
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Refreshing Concessions
Project Value
SAIF
Revaluation exceeds
cash available
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Cash distribution
End of
exceeds revaluation Concession
Other benefits
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Other benefits
 Basis for a globally competitive economy
 Stimulates stronger economic growth
- 1% increase in infrastructure stock = 1% increase
in GDP
 Redistribution of State Spending
 Generates new jobs
 Increases economic productivity
 Alleviates Poverty
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Why Infrastructure

Government objectives:
- Reduce public sector borrowing & cost
- Operational efficiencies of private
sector
- Focus on user benefits & service
delivery
- Speed up infrastructure development
- Optimal risk allocation between public
and private sector
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Conclusion
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Investor appetite
 Institutional appetite has broadened and deepened
 Initially through private equity funds or direct
private investments
 Critical mass build-up
 Public listing – international precedent for both
listed funds and direct investments
 Asset class diversification
 Liquidity
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Government role
 Government vital to future of asset class
 Will and competence
 Stability of policy
 Public entities with track record
 Private sector efficiencies
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Regulatory Information
Old Mutual Asset Managers (South Africa) (Pty) Ltd
Physical Address:
Mutualpark
Jan Smuts Drive
Pinelands
7405
Telephone number: +27 21 5095082 (Mike van Heerden)
Internet website: www.omam.com
Old Mutual Asset Managers (South Africa) (Pty) Ltd (“OMAM (SA)”) is a licensed discretionary financial
services provider approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide
intermediary services and advice in terms of the Financial Advisors and Intermediary Services Act 37 of
2002. OMAM (SA) is a wholly owned subsidiary of Old Mutual South Africa Limited.
Market fluctuations and changes in rates of exchange or taxation may have an effect on the value,
price or income of investments. Since the performance of financial markets fluctuate, an investor may
not get back the full amount invested. Past performance is not necessarily a guide to future investment
performance.
All returns are rand returns, unless otherwise stated.
Investment deals done on behalf of clients with a company in the Old Mutual Group are all done on an
arms length basis.
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