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Opportunities in Infrastructure Investment
1. People. Ideas. Success.
Guggenheim Partners
Opportunities In Infrastructure Investment
Scott Minerd
Global Chief Investment Officer
January 2014
CONFIDENTIAL
Guggenheim Investments (“Guggenheim”) represents the following affiliated investment management businesses of Guggenheim Partners, LLC: GS GAMMA Advisors, LLC, Guggenheim Aviation, Guggenheim Funds Distributors, LLC, Guggenheim
Funds Investment Advisors, LLC, Guggenheim Partners Investment Management, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners India Management, Guggenheim Real Estate, LLC, Security Investors, LLC and Transparent
Value Advisors, LLC. This material is intended to inform you of services available through Guggenheim Investments’ affiliate businesses.
2. Infrastructure Investment In Today’s Macroeconomic Environment
Please see Disclosures and Legal Notice at end of Document
2
3. Global Debasement Will Erode Purchasing Power
Global Major Central Banks Combined Balance Sheet Assets as % of GDP*
30%
27.5%
25%
20%
15%
10%
2007
2008
2009
2010
2011
2012
2013
Source: Bloomberg, Guggenheim Investments. Data updated as of 12/31/2013.
*Note: Major central banks include ECB, BoJ, BoE, and Fed. Data is combined after converting to U.S. dollars.
Please see Disclosures and Legal Notice at end of Document
3
4. Debtors Have Gained An Advantage Over Creditors
Real 10-Year Government Bond Yields*
12%
U.S.
Germany
France
U.K.
10%
8%
6%
4%
2%
0%
-2%
-4%
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Source: Bloomberg, Guggenheim Investments. Data updated as of 12/31/2013.
*Note: Real 10-year government bond yields are nominal yields subtracted by CPI YoY rate.
Please see Disclosures and Legal Notice at end of Document
4
5. Growing Divide In Asset-liability Matching For Pension Funds
Defined Benefit Pension Funds Asset and Liability Growth – Global Basis* (Normalized Levels at the End of 1998 = 100)
250
200
Liabilities
150
100
Assets
50
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Global Pension Assets Study 2013 , Tower Watson, January 2013.
*Note: Global basis includes Australia, Canada, France, Germany, Hong Kong, Ireland, Japan, Netherlands, Switzerland, U.K., U.S.
Please see Disclosures and Legal Notice at end of Document
5
6. Why Infrastructure?
The Infrastructure asset class has an attractive risk-return profile and provides compelling investment opportunity for private capital.
INFRASTRUCTURE PROFILE
•
•
Stable, predictable returns characterized by
high cash yields and inflation protection
•
Regulatory
processes
Regulated or monopoly-like environment
– High barriers to entry
– Assets difficult to replicate
– Low bypass risk
•
Diversification
of risk
Essential service to the economy or
community
•
Low business model and operating risk
•
Population
growth
Real assets
Inelastic demand and resilience to
economic downturns
Ageing
infrastructure
GLOBAL MACROECONOMIC
DRIVERS OF
INFRASTRUCTURE
Sustainability and
natural resources
scarcity
De-leveraging and
refinancing
Fiscal pressures
requiring private
participation
INFRASTRUCTURE OPPORTUNITIES
•
•
Economic infrastructure
– Transport: bridges, toll roads, tunnels,
airports, seaports, freight rail
– Utilities: gas and electricity networks,
power generation, water and sewage
– Other: car parks, storage facilities,
renewable energy, communication
infrastructure
Social infrastructure
Education
– Healthcare
–
Please see Disclosures and Legal Notice at end of Document
6
7. Increasing Pension Fund Allocations To Alternative Investments
Global Pension Asset Allocation
100%
3%
5%
1%
6%
6%
12%
2%
15%
1%
19%
Infrastructure:
6% of Total
Alternative
80%
30%
40%
36%
28%
33%
Cash
60%
Alternative
Bonds
Equities
40%
61%
51%
49%
55%
47%
20%
0%
1995
1999
2003
2007
2012
Source: Global Pension Assets Study 2013 , Tower Watson, January 2013.
Please see Disclosures and Legal Notice at end of Document
7
9. Infrastructure Investment Can Offer Protection Against Inflation
EBITDA for an Equally Weighted Infrastructure Portfolio Compared to U.S. and EU-15 CPI Average* (1986-2006)
250
Economic
Slowdown
Economic
Slowdown
200
Infrastructure Portfolio
150
CPI Average
100
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Infrastructure Investing: A Portfolio Diversifier with Stable Cash Yields, J.P. Morgan Asset Management, FactSet, FAA, FHWA, ZMARAD, Eurostat, OECD, IMF, and company websites.
*Note: Equally weighted infrastructure portfolio includes 256 mature infrastructure assets in the U.S. and EU-15 countries during 1986 – 2006. The data is not adjusted for exchange rates.
Please see Disclosures and Legal Notice at end of Document
9
10. Infrastructure Investment Provides Stable Cash Flows
Annualized Volatility Comparison - Infrastructure Usage, U.S. Non-Discretionary Spending, and Equity Returns* (2000 – Present)
20%
Equities
Non-discretionary
Consumption (USD)
Infrastructure
Usage (units)
16%
12%
Highly correlated
with weather
8%
4%
0%
S&P
500
MSCI
World
FTSE
100
MSCI
Europe
Groceries Clothing
(U.S.)
(U.S.)
Drugs
(U.S.)
Electricity
(U.S. and
E.U-15)
Water
(U.S.)
Miles
Driven
(U.S. and
U.K.)
Enplane- Natural Gas
ments Consumption
(U.S. and
(U.S. and
E.U-15)
E.U-15)
Source: J.P. Morgan Asset Management, Bloomberg, Economy.com, U.S. Energy Information Administration, U.S. Bureau of Transportation Statistics, Eurostat, Guggenheim Investments. Data updated as of 12/31/2013 for equity returns and as of
12/31/2012 for others. *Note: Equity returns are total return basis.
Please see Disclosures and Legal Notice at end of Document
10
11. Infrastructure Investment Has Outperformed Over The Past Decade
Historical Return and Volatility (January 2003 – Present)
18%
Dow Jones Brookfield Global
Infrastructure Total Return
Index
15%
Annualized Return
12%
MSCI World Total Return
Index
Credit Suisse US High Yield
Total Return Index
9%
S&P500 Total Return Index
Dow Jones Credit Suisse
Hedge Fund Index
6%
Barclays US Agg Total
Return Index
3%
Dow Jones-UBS Commodity
Total Return Index
0%
0%
5%
10%
15%
20%
25%
Annualized Volatility
Source: Bloomberg, MSCI, UBS, Credit Suisse, Barclays, Guggenheim Investments. Data updated as of 12/31/2013.
Please see Disclosures and Legal Notice at end of Document
11
13. Global Infrastructure Investment Needs, 2013-2030
Global Infrastructure Investment Needs, 2013-2030
$70 Trn
$60 Trn
$9.5 Trn
$57.3 Trn
Telecom
Total
$11.7 Trn
$50 Trn
$40 Trn
$12.2 Trn
$30 Trn
$0.7 Trn
$2.0 Trn
Ports
Airports
$4.5 Trn
$20 Trn
$16.6 Trn
$10 Trn
$0 Trn
Roads
Rail
Power
Water
Source: Infrastructure Productivity: How to Save $1 Trillion a Year, McKinsey Global Institute, January 2013.
Please see Disclosures and Legal Notice at end of Document
13
14. Global Infrastructure Opportunity
GLOBAL – $57 TRILLION (2013 – 2030)
•
•
Global GDP could double by 2030
• Current gateway and inland transport infrastructure cannot meet 2030 demand
• Quality infrastructure is key pillar of international competitiveness
Private sector financing continues to deliver equity and debt capital needed to make infrastructure projects operational
AMERICAS
EUROPE
ASIA PACIFIC
•
Evolving regulation
•
Clarity over regulation
Asia
•
Highly localized, political and complicated
•
Financial crisis
•
Combination of emerging and mature markets
•
Fiscal stimulus
•
Sovereign crisis
•
Immature regulation
•
Significant underinvestment in public infrastructure and
•
Significant buying opportunity
•
Significant demand for infrastructure
•
Political risk
future investment gap in public infrastructure spending
•
Limited privatization opportunities
•
Predominately energy assets available for purchase
Australia
–
Partial deregulation; failed market solutions for pricing
•
Extremely mature market
energy and capacity
•
Privatization in some states
–
Environmental regulations driving investment
•
Domestic funds have significant exposure
–
Continued portfolio rationalization by strategic
•
Market history has been both good and bad
corporations
•
South American opportunities are a developing focus
Source: Infrastructure Productivity: How to Save $1 Trillion a Year, McKinsey Global Institute, January 2013.
Please see Disclosures and Legal Notice at end of Document
14
15. More Infrastructure Spending Is Needed In Developed Countries
Infrastructure Stock Value as Percent of GDP
Infrastructure Spending as Percent of GDP
6%
Japan
Actual spend during 1992 - 2011
5%
South Africa
Estimated need during 2013 - 2030
Italy
4%
Poland
3%
China
2%
Spain
Germany
1%
United States
0%
Average excluding
Brazil and Japan = 71%
India
Japan
United
States
EU
Other
Developing
Developed
World
Canada
United Kingdom
Brazil
0
50
100
150
200
The world will need to spend more than it has over the past
twenty years in order to maintain the infrastructure stock
value to 70% of GDP. Developed countries include U.S. and
EU are particularly underfunded.
Source: Infrastructure Productivity: How to Save $1 Trillion a Year, McKinsey Global Institute, January 2013.
Please see Disclosures and Legal Notice at end of Document
15
16. Rising Demand Of Infrastructure Investment From Rapid Urbanization In Emerging Markets
Breakdown of Global Urban Population 1950 - 2015
80%
Emerging
Developed
70%
60%
50%
40%
30%
20%
10%
0%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: United Nations, The Infrastructure Opportunity: Repair, Build and Stimulate, Morgan Stanley Investment Management, February 2009
Please see Disclosures and Legal Notice at end of Document
16
17. I. North America Energy Infrastructure Opportunity
Please see Disclosures and Legal Notice at end of Document
17
18. Why North America Energy Infrastructure?
Significant capital requirements in robust and diversified market
•
Infrastructure Investment Criteria
•
•
•
Compelling Investment Opportunity
•
•
•
•
•
Attractive Sector Fundamentals
•
•
•
•
•
Asset Management Potential
Assets typically have high capital costs representing a significant barrier to entry
Assets frequently operate in a regulated or contracted environment providing high cash flow visibility
The need for energy is relatively inelastic
Long life assets (30 – 40 years) and high replacement costs provide a hedge against inflation
North America requires over $6.4 trillion* in energy infrastructure development
Private capital is crucial to satisfying the investment requirements of the energy industry
Strong economic, environmental and policy trends driving coal plant retirements
Abundant and low cost gas supply driving fuel mix and demand for investment in related facilities
Policy driven demand for renewable energy in select locations
Historic underinvestment in critical energy infrastructure assets, including electricity transmission and pipelines
Evolving E&P technologies stimulating natural gas and oil midstream infrastructure investment in new shale regions
Attractive asset valuations below cost of new build
Portfolio rationalization by corporate and financial owners driving divestitures
Opportunities to increase asset value through:
– Modernization, expansion, rehabilitation
– Revenue optimization, including contract renegotiation, ancillary / value-added services
– Cost rationalization
– Leveraging services across multiple assets
Source: Guggenheim Investment, International Energy Agency, World Energy Outlook 2012.
*Note: Figure represents projected cumulative investment in energy-supply infrastructure from 2012 to 2035.
Please see Disclosures and Legal Notice at end of Document
18
19. Expected Growth Of Oil And Natural Gas Production In The U.S.
U.S. Crude Oil Production
U.S. Dry Natural Gas Production
Million Barrels
per Day
Million Cubic
Feet
40
12
35
10
30
8
25
6
20
15
4
10
2
5
Projection
0
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040
Projection
0
1950
1960
1970
% of Production
1980
1990
2000
2010
2020
2030
2040
% of Production
Tight Oil
34.7%
42.7%
Lower 48 Offshore
21.0%
8.2%
3.5%
9.3%
Tight Gas
20.2%
22.4%
40.4%
52.8%
6.6%
4.5%
Lower 48 Offshore
6.9%
7.9%
1.4%
3.1%
26.6%
Alaska
24.6%
Alaska
27.2%
Lower 48 Onshore Conventional
Coalbed Methane
36.1%
2040
2040
Lower 48 Onshore (ex Tight Oil)
2012
Shale Gas
2012
Source: U.S. Energy Information Administration (EIA). Data updated as of 12/31/2013.
Please see Disclosures and Legal Notice at end of Document
19
20. The U.S. Will Be An Energy Exporter By 2035
Oil and Gas Import Dependency in Selected Countries – 2010 vs. 2035
Gas Imports
100%
Japan
2010
80%
2035
European
Union
60%
40%
China
India
20%
0%
United States
(20%)
Gas Exports
20%
40%
60%
80%
100%
Oil Imports
Source: IEA World Energy Outlook 2012, Guggenheim Investments. Data updated as of 12/31/2013.
Please see Disclosures and Legal Notice at end of Document
20
21. Development Of U.S. Natural Gas Presents Promising Investment Opportunities
Total U.S. Natural Gas Production, Consumption, and Net Imports (1990 – 2035)
40
Net exports of 15.7% of
total production in 2035
The lack of infrastructure in certain
basins for transporting and
processing NGLs is creating a
35
temporary bottleneck for
Trillion Cubic Feet
development. Remotely located
basins face challenges in getting the
30
Net imports of 5.7% of
total consumption in 2013
product out of the ground and into
the marketplace. Significant
investment in infrastructure will be
25
needed over the next 25 years, with
capital requirements expected to
exceed US$200 billion countrywide
during that period.
20
-- KPMG Shale Gas: Global M&A
Trends, 2011
15
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
Source: EIA Annual Energy Outlook 2014 Early Release, KPMG Shale Gas: Global M&A Trends, 2011. Data updated as of 12/31/2013.
Please see Disclosures and Legal Notice at end of Document
21
22. Fuel And Technology Transformation
•
Natural gas is replacing coal as the fuel of choice
–
–
•
Abundant supplies point to lower and more stable prices
Natural gas emits substantially less air pollutants and greenhouse gases
Over $80 billion1 of capital estimated to be required to replace the estimated 59 – 77 GW 2 of coal-fired generation capacity
retirements by 2016
–
Environmental regulations and fuel costs are driving the switch from coal to natural gas
US Electrical Generation by Fuel Type (MWh)
45%
Coal
35%
Natural Gas
25%
Renewables
15%
Nuclear
5%
2010
2015
2020
2025
2030
2035
2040
Source: EIA 2014 Annual Energy Outlook Early Release. *Note: 1. Based on Guggenheim Infrastructure estimated replacement mix of 80% gas / 20% renewables and estimated construction rates of $1,100/kW for natural gas and $2,500/kW for
renewables. 2. Potential Coal Plant Retirements 2012 Update, The Brattle Group, October 2012.
Please see Disclosures and Legal Notice at end of Document
22
23. Geologically Diverse Hydrocarbon Supply
•
Considerable infrastructure investment required to satisfy infrastructure demands of new shale plays
Location of Major U.S. Shale Plays
Shale Resource Estimates
Gas
(Trillion
Cubic feet)
Oil
(Billion
Barrels)
Region
Shale Play Examples
Northeast
Marcellus, Antrim,
Devonian
472
--
Gulf Coast
Haynesville, Eagle Ford
100
3
Mid-Continent
Fayatteville, Woodford
60
--
Southwest
Barnett
76
2
Rocky Mountain
Mancos, Lewis, Bakken
43
4
West Coast
Monterey / Santos
--
15
Total Onshore Lower-48 States:
750
24
Source: Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays, U.S. Energy Information Administration, July 2011.
Please see Disclosures and Legal Notice at end of Document
23
24. Related Energy Infrastructure Opportunities
Midstream Oil & Gas Infrastructure to Support New Shale Plays1
Electricity Transmission
•
Historic underinvestment in transmission grid
– Cost allocation issues
– Permitting and siting difficulties
•
As much as $320 billion2 in transmission investment from 2011 –
2030 needed to alleviate bottlenecks and integrate renewable
resources to load centers
•
In North America, 34,000 circuit miles, of new high-voltage
transmission lines are expected to be added from 2012 - 20223
Natural Gas needs 2011 - 2035:
• 50,000 miles of mainline & lateral pipelines
• 589 Bcf storage capacity
• 32.5 Bcf processing capacity
• Total investment required for natural gas is ~$205 billion
Oil and NGL needs 2011 - 2035:
• 5 million bpd of transmission mainline capacity for oil
•
•
US Historical and Forecast Transmission Investment2
2 million bpd of transmission mainline capacity for NGLs
Total investment for oil & NGLs is ~$46 billion
Forecast Midstream Infrastructure Investment 2011 – 20351 ($ Billion)
$46
$98
$23
$13
$43
Mainline Gas Pipe
Compression & Storage
$30
Lateral Gas Pipe
Processing
Gas Gathering Pipe
Oil & NGL Pipelines
Source: 1. Interstate Natural Gas Association of America Foundation, 06.18.2011 and 02.15.2012. 2. Transmission Investment Trends and Planning Challenges, The Brattle Group, August 2012. 3. 2012 Long-Term Reliability
Assessment, NERC, December 2012.
Please see Disclosures and Legal Notice at end of Document
24
26. The Polar Ice Cap In The Arctic Region Is Melting Rapidly
Average Monthly Arctic Sea Ice Extent (September 1979 to 2013)
sq. km
9M
8M
7M
6M
5M
4M
3M
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
Source: Goddard Sea Ice Remote Sensing & National Snow and Ice Data Center. Data shown from September 1979 through December 2013.
Please see Disclosures and Legal Notice at end of Document
26
27. Opportunities Abound: Shipping Shortcuts – Up To 50% Faster Through The Arctic
Source: U.S. Geological Survey
Please see Disclosures and Legal Notice at end of Document
27
28. The Arctic Expected To Be The Fastest Growing Region In The World
Projected Transit Freight in Traffic Volume along the Northern Sea Route
100
80
Million Tonnes
Transit
The Northern Sea Route - East
60
The Northern Sea Route - West
40
From Murmansk to Northern
Sea Route Starting Point
20
0
2016
2020
2030
Source: The Issues and Prospects of an Expanded Arctic Transportation Network, Alexei Konovalov, 2012.
Please see Disclosures and Legal Notice at end of Document
28
29. III. Opportunities in the Infrastructure Investment Vehicles
Please see Disclosures and Legal Notice at end of Document
29
30. Comparison Of Infrastructure Investment Vehicles
Investment Vehicles
Return Composition
Size
Unlisted Infrastructure
Capital growth in early years,
income-dominated at mature
stage
> $200 million
Infrastructure Equities
Mix of growth and income
components
Institutional Bonds
Liquidity
Maturity
General Annual Return
Illiquid
Long-term
Mature: 7% to 10%
Any Amount
Established and increasing
volumes in most markets
Short to
Long-term
Typical historical returns of 10%+
Set coupon and low
growth rate
Any Amount
Deep volumes in
most markets
Short to
Long-term
5% to 7%
Institutional Direct
Real Estate
Mixed income and capital
appreciation
> $20 million
Moderate to deep
volumes in most markets
Medium to
Long-term
Core: 7% to 9%
Value-added: 11% to 15%
Opportunity: 18%+
Public Equities
Mix of growth and income
components
Any Amount
Deep volumes in most
markets
Short to
Long-term
Large possible range of returns
Source: A Compelling Investment Opportunity: The Case for Global Listed Infrastructure Revisited, RREEF Research, July 2011.
Please see Disclosures and Legal Notice at end of Document
30
31. Other Investment Types Expected To Gain On Private Infrastructure Investment
Investor Survey on Infrastructure Investment – Percent of Responders on Current and Future Implementation Methods
Private (Closed end)
Private (Open end)
Global listed infrastructure
Infrastructure debt
Co-investments
Directly in underlying assets
Fund of funds
Current
Secondaries
Future
Don't Know
0%
10%
20%
30%
40%
50%
60%
70%
80%
Source: Russell Investments’ 2012 Global Survey on Alternative Investing, Russell Investments, June 2012.
Please see Disclosures and Legal Notice at end of Document
31
32. European Bank Lending To The Infrastructure Sector Has Declined
Due To Ongoing Crisis And Increased Regulations On Bank Capital Requirements
European Project Finance Volume by Source of Funding
$120 Bn
400
Bank loan (LHS)
Bond (LHS)
Equity (LHS)
Number of Projects (RHS)
$90 Bn
300
$60 Bn
200
$30 Bn
100
$0 Bn
0
2005
2006
2007
2008
2009
2010
2011
2012*
Source: From Policy to Proof of Concept, and Beyond – Outlook for infrastructure 2012, Freshfields Bruckhaus Deringer LLP, October 2012, Dealogic. *Note: 2012 data is annualized based on data in the first six months.
Please see Disclosures and Legal Notice at end of Document
32
33. Infrastructure Debt – Opportunities In Junior Debt
Subordinated Bonds and Senior Debt Tranche
Unwrapped
Senior Bond with
Rating of A
Equity
Junior Bonds
Wrapped Senior
Bonds Credit Rating
AAA with Underlying
Rating of BBB
Traditional Infrastructure Bond
Finance Structure
Equity
New Infrastructure Bond
Finance Structure
A new model of project financial structures could reduce the risk to the senior debt tranche, increase the overall rating, and
hence, improve the risk-reward profile. The amount of senior bonds required could be reduced and the gap could be filled by junior
bonds. The junior bonds would be acquired by specialist investors and would attract a higher yield than the senior bonds.
Source: Paving the Way: Maximizing the Value of Private Finance in Infrastructure, World Economic Forum, August 2010
Please see Disclosures and Legal Notice at end of Document
33
34. Appendix: Disclosures and Legal Notice
Please see Disclosures and Legal Notice at end of Document
34