U.S. Policy Makers Have Major Incentives to Monetize Assets

Privatization of public assets, a practice more commonly done in other countries, marks the frontier of infrastructure investment in the United States.

Privatization attempts in the United States today are surrounded by public protest and controversy, making it difficult to accomplish, said Mark Florian, ’82, managing director, First Reserve Corporation. This was the same environment that Australia experienced 15 to 20 years ago, he said in a panel discussion at the Beecken Petty O’Keefe & Company Private Equity Conference February 19 at the Hyatt Regency in Chicago. Howard Marks, ’69, chairman of Oaktree Capital Management, was among the featured speakers.

“I’m an optimist that there’s going to be a lot more [five years from now]”, Florian said, with cities looking at privatizing such areas as parking, real estate, and roads. “I think it’s going to happen. It’s just going to be a slow grind.” The process will become more of a routine as public decision-makers and advisors gain more experience with privatization.

William Atwood, MA ’07, executive director, Illinois State Board of Investments, said policy makers in the United States have major incentives to monetize their assets to get needed cash. “I’m just not optimistic that that’s going to make them do it. Privatization in Chicago has worked well for the budget director and the city, but the public can get very skeptical about it.”

The economic downturn also affects other kinds of infrastructure investment.

“A lot of people invested in infrastructure five years ago, expecting to have low volatility, a very stable asset base, and to get a significant cash yield,” Florian said. “And I think there’s been some discovery in the marketplace, particularly through this economic cycle, that certain types of assets actually have more volatility. Either they were overleveraged or there were aggressive expectations for performance, and some types of assets haven’t performed at that level. The recent economic volatility has affected some types of infrastructure investments.”

Take ports, for example. Florian said the container business on the West Coast had been booming with business from Asia, offering a “pretty extraordinary” compounded 8 percent a year growth for the previous twenty years. Last year, though, West Coast port business plunged 35 percent, he said.

Investors are focusing on protecting against economic cycles and making sure they are creating yield, he said.

The same type of infrastructure asset may yield different benefits depending on location. A privatized Chicago Skyway is a more attractive asset than a privatized Indiana Tollroad, said Graeme Bevans, vice president and head of infrastructure, Canadian Pension Plan Investment Board.

“Roads like Chicago Skyway are more attractive and less volatile in terms of economic performance,” he said, because inner city roads tend to be used regardless of economic conditions that might cut traffic levels on other highways.

One key factor in dealing with infrastructure investments: “You have to be able to get along with governments,” Bevans said.

Ben Heap, managing director, infrastructure asset management, UBS Global Asset Management (Americas), said his company hasn’t taken on any roads or government assets here. “Part of the reason for that is the environment here in the U.S. to execute on some of these government transactions is frankly challenging,” Heap said. Enormous time and money go into infrastructure investment transactions, so execution risks must be managed. “The problem with an environment that is less than encouraging is that execution risk becomes quite high.”

Nikhil Prashar, first-year student in the Full-Time MBA Program, said a common perception about infrastructure investment is that it’s not as volatile as other types of investments. “People have really looked at infrastructure as sort of a lump of asset classes,” when in reality each class has its own volatility. “The market’s becoming a lot more sophisticated in terms of how it thinks of each asset class.”

Prashar said the fact that the United States is where Australia was 20 years ago in terms of privatization of public infrastructure “makes for a very exciting career choice with the potential for a lot more privatization.”

—Mary Sue Penn

Read about Marks’s keynote speech.