Global Infrastructure A New Alternative Asset Class Edward Keating Product Specialist, Global Infrastructure December 2007 Lazard Asset Management LLC This presentation and all research and materials enclosed are property of Lazard Asset Management LLC. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change. 2007 Lazard Asset Management LLC Infrastructure Investing: Agenda 1. What is Infrastructure? Why invest? Global need for infrastructure investment Classifying Infrastructure Investments 2. How to access Infrastructure? The global opportunity set Three approaches for access How are plans utilizing infrastructure 3. Investing in Infrastructure Critical investment factors to consider Example infrastructure assets 4. Summary and Q&A --Appendix
The Infrastructure Asset Class Infrastructure comprises the physical assets that a society requires to facilitate its orderly operation. They include: Transport (toll roads, airports, seaports, rail) Energy (gas and electricity transmission, distribution and generation) Water (pipelines and treatment plants) Communications (broadcast, satellite and cable) Social (hospitals, schools, prisons) Why Invest in Infrastructure? Infrastructure can have attractive investment characteristics, including Low volatility with diminished correlation to other assets Long term perspective Real assets High visibility of future performance Low risk of capital loss Inflation Protection
Declining Government Infrastructure Spending 16 14 1970 1980 1990 2002 12 10 8 6 4 2 0 Canada Australia France Germany United U.S.A. Kingdom Government Spending on Infrastructure in OECD Countries (as % of GDP) 1991-1997: 2.6% 1997-2003: 2.2% Government Capital Formation (as % of GDP) 1984: 7.5% 2002: 3.9% Source: OECD (Organisation for Economic Co-operation and Development) national accounts The Global $41 Trillion Dollar Question? Total projected cumulative infrastructure spending 2005 2030: $41 trillion 16% 22% 1% 1% 6% 17% 16% 2% 4% 4% 12% 13% 9% 1% 27% 4% 20% 12% 40% 27% 40% 47% 27% 32% Water $22.6T Power $9.0T Road and rail $7.8T Air/seaports $1.6T Middle East ($0.9Trillion) Africa ($1.1Trillion) U.S./Canada ($6.5Trillion) South America/Latin America ($7.4Trillion) Europe ($9.1Trillion) Asia/Oceania ($15.8Trillion) Percentages of the total projected cumulative infrastructure investment needed during the next 25 years to modernize obsolescent systems and meet expanding demand, broken down by region (rows) and sector (columns). Source: Booz Allen Hamilton, Global Infrastructure Partners, World Energy Outlook, Organisation for Economic Co-operation and Development (OECD), Boeing, Drewry Shipping Consultants, U.S. Department of Transportation
Demand for Infrastructure in the U.S.A. The American Society of Civil Engineers (ASCE) estimates that $1.6 trillion is needed over a five-year period to bring the nation's infrastructure to good condition Report Card for America s Infrastructure: 5-Year Outlook Sector Grade Investment Need Aviation/Aerospace D+ $16 billion per year Bridges C $9.4 Billion per year Dams D+ $10.1 Billion per year Drinking Water D- $11 Billion per year Energy D $493 Billion Hazardous Waste D $1.9 Billion per year Navigable Water Ways D- $125 Billion Public Parks & Recreation C- $6.1 Billion Rail C- $12-$13 Billion per year Roads D $34.6 Billion per year Solid Waste C+ $127 Billion Transit D+ $20.6 Billion Wastewater D- $390 Billion Total D $1.6 Trillion Source: ASCE Classifying Infrastructure Assets Maturity of Asset: Greenfield vs. Brownfield Greenfield vs. Brownfield Assets Greenfield Brownfield What is it New build infrastructure Existing infrastructure Cost Expensive to build Expensive to acquire Risk/Reward Profile High Risks, High potential return Lower risks, lower return potential Key Potential Risks Design, Development, Improvement, Expansion Environmental, Construction, Operational Ramp-up, Operational, Asset Performance History NA Typically Available Location of Asset: Developed vs. Emerging Markets Political and Regulatory risk is the largest risk in infrastructure investing Developed legal systems and economies of the world generally provide a safer haven for infrastructure investors The Emerging Markets (i.e.: non-oecd) may provide higher returns, but also significantly increase the risk of infrastructure investments
Where Can Infrastructure Fit in a Plan Allocation? Infrastructure Characteristic Long life, long duration Low risk, predictable cash flow Stable profile Inflation linked revenues Equity like returns Opportunistic Plan Allocation Fit Core Real Estate Fixed Income TIPS Commodities Real Assets Private Equity Enhanced Real Estate May warrant a dedicated Infrastructure allocation/bucket Where have investors made allocations Separate Infrastructure allocation Alternatives Allocation Real Assets Inflation Hedge: Often paired with commodities, timber, gold etc. Fixed Income and Equity Allocations With risk/reward profile between bonds and equities 3 Approaches to Access Global Infrastructure Access Direct Investment Purchase assets directly own outright Private Equity Fund Invest in a PE fund with other investors Public Listed Markets Invest in traded equities of assets Utilized by Mega Pension Plans Large & Mid-Size Pension Plans Pension Plans of all sizes, Individuals Opportunity Set <~US$200bn <US$300bn US$2 trillion + Diversification 5-10 (max) Assets 5-10 (max) Assets 25-50 stocks (70+ assets) Time to Invest ~3-years + ~3-years + Immediate Liquidity 10-years + 10-years + Daily Leverage < 2x EBITDA cover < 2x EBITDA cover 6x EBITDA cover Fees High cost (internal) 200bps +20% 65bps (US$300m) Allocations and information stated above is subject to change.
The Global Opportunity Set The Direct/Private Equity opportunity set is hard to define, unpredictable The Publicly Listed opportunity set is the largest global infrastructure marketplace, and is easily defined and quantified North America Europe Asia Aust/NZ Electric utilities Gas utilities Water utilities Diversified utilities Airports Tollroads Railways Marine ports Pipelines Other Number of companies More than 20 11 to 20 4 to 10 1 to 3 Total market capitalisation US$2.1 trillion Source: Lazard Asset Management - Approx 230 stocks in Universe Selection Database, 30 November 2006 Infrastructure Access: Direct/Private Equity vs. Public Listed Markets Potential Advantages Potential Disadvantages Direct / Private Equity Illiquidity return premium Smoothed return profile Lumpy investments; illiquidity on disposal High specific investment risk Tax implications; low transparency Increased capital chasing few deals; competitive bidding Public Listed Markets Easy access Full diversification Liquidity Short term correlation to listed equity markets Lower risk profile translates into lower expected returns Ideal Investment Arena Greenfield projects Developing markets Higher Free Cash Flow generation Mature markets
How are Pension Plans Using Infrastructure? Plan Allocation 2-10% (typically) Access Use of Private Equity Funds Access to Private Equity (PE) deal flow (key customer focus) Also have access to Public Listed Market managers Unlikely to have internal resources for Direct Investment Aware of PE Risks: Concentration (5-10 max. assets), Leverage (<2x EBITDA cover), Regional/Sector Focus, Illiquidity Typically use more than one manager (2-4 usual) to diversify Concentration and Regional/Sector Focus risks Use of Public Markets May use a Listed infrastructure manager (as complement): Immediate Access to the infrastructure asset class Increase Diversification (25-50 stocks, 70+ assets, global) Reduce asset specific risk, increase regional/sector exposures Manage Pension Plans cashflows, PE capital calls etc. Investing in Infrastructure: Critical Investment Factors Infrastructure assets can have attractive investment characteristics, including: -Long-life assets -Inflation-linked returns -Low risk of capital loss -Low correlations (diversifier) What Parameters to Focus on Revenue Certainty Stable demand Monopolistic characteristics Price regulated and inflation-linked linked Long term Profitability Longevity High operating margins Sustainable leverage Appropriate cost structure Developed economy and legal system An asset meeting these parameters is considered Preferred Infrastructure
European Airports Zurich Airport Why Preferred Infrastructure? Revenue certainty Monopolistic asset, passenger growth GDP+ Regulated, long-term pricing structure CPI+ pricing Costs High operating margins & predictable costs Why Attractive? 1999-2000 - airport size doubles (i.e new terminals to take more passengers). A major hub (transfer point) for international passengers in Europe for Swiss Air 9/11 air traffic halved. Airport nearly bankrupt Regulator allows Airport to double landing charges to ensure the airport (an essential service) is profitable Traffic has recovered, increased landing charges remain & operating performance has improved markedly Source: Lazard Asset Management. The information identified above should not be considered a recommendation or solicitation to purchase or sell. It should not be assumed that any investment was, or will be profitable. Japan s Gas Distribution Network Why Preferred Infrastructure? Revenue certainty Monopoly assets (gas distribution in major cities like Tokyo & Osaka) with stable demand and CPI-linked revenue growth Regulated, long-term pricing structure, ROA focus Costs High operating margins & predictable costs Why Attractive? Assets performance improved and balance sheet much healthier Can invest in these assets at same price as in 2000 despite lower risk inherent in assets (i.e. price reflects same earnings multiple, yield) These assets are therefore not only cheap compared to history, but also against other similar gas utilities around the world Source: Lazard Asset Management. The information identified above should not be considered a recommendation or solicitation to purchase or sell. It should not be assumed that any investment was, or will be profitable.
Investing In Infrastructure: Summary Potential Attractive Investment Characteristics Diversifier, Long term, Low Risk, Inflation Hedge Focus on specific Company/Asset factors Revenue Certainty, Profitability and Longevity Infrastructure Access: Direct vs. Listed, things to consider How much Risk (leverage, development, emerging markets)? What are the liquidity terms (lock-ups)? What level of diversification (investments, sector, country)? Management Fees (asset based, performance based)? Infrastructure Risk/Reward Profile Expected Return Infrastructure ownership Private Equity Hedge Funds Equities Cash Fixed Income Preferred Infrastructure Real assets Infrastructure development Lazard Asset Management Pacific Co. For illustrative purposes only. Expected Volatility
Infrastructure Historic Performance In the absence of any infrastructure benchmark or appropriate investment series, we have used the returns of our dataset. We recognise that this result is compromised by survivor bias and therefore the results should be considered with significant caution. Sector Annualised Return (1990-2006) Standard Deviation (1990-2006) Worst 12 month Return (1990-2006) Best 12 month Return (1990-2006) Global Equities 6.9% p.a. 13.6% p.a. -29.1% 40.6% US Equities 9.9% p.a. 14.0% p.a. -26.6% 52.3% Infrastructure 11.0% p.a. 9.0% p.a. -12.5% 34.0% US Debt 7.2% p.a. 3.8% p.a. -3.7% 18.5% Source: Lazard Asset Management Pacific Co. Global Equities: MSCI World (net dividends reinvested). US Equities: S&P 500. US Debt: Lehman Brothers Aggregate Bond Index. (All index data in local currency.) Infrastructure: Data is preliminary. Calculations are for the period 1 January 1990 to 31 December 2006 using monthly data. The performance information shown for the Infrastructure portfolio reflects the historic returns of a universe of approximately 230 stocks identified by Lazard from which Lazard could select investments for potential inclusion in a Global Listed Infrastructure account at 31 December 2006. Principal criteria for inclusion were infrastructure-owning companies, domiciled in the OECD, with a minimum market capitalisation of US$250 million. The performance information was calculated using the monthly median return of such stocks from 1 January 1990 to 31 December 2006. Performance is shown gross of any fees. The Infrastructure performance shown does not reflect the performance of any fund or account actually managed by Lazard. It is for illustrative purposes only and is not intended to reflect the performance of Lazard's Global Listed Infrastructure strategy, which may differ. Past performance is no guarantee of future results. Infrastructure vs. Global Equities and Bonds Rolling 3-year Correlation (% Returns) 0.8 0.7 0.6 Infrastructure beta vs. Global Equities 0.5 vs. Global Bonds 0.3 0.5 0.4 0.3 0.2 0.1 0.0-0.1-0.2-0.3 Mar-94 Nov-94 Jul-95 Mar-96 Nov-96 Jul-97 Mar-98 Nov-98 Jul-99 Mar-00 Nov-00 Jul-01 Mar-02 Nov-02 Jul-03 Mar-04 Nov-04 Jul-05 Dec-05 230 Infrastructure Universe vs. MSCI World 230 Infrastructure Universe vs. JPMorgan Global Government Bond Index The performance information shown for the Infrastructure portfolio reflects the historic returns of a universe of approximately 230 stocks identified by Lazard from which Lazard could select investments for potential inclusion in a Global Infrastructure account at December 31, 2005. Principal criteria for inclusion were infrastructure owning companies, domiciled in the OECD, with a minimum market capitalization of U.S. $250 million. The performance information was calculated using the monthly median return of such stocks from January 1, 1990 to December 31, 2005. Performance is shown gross of any fees. The Infrastructure performance shown does not reflect the performance of any fund or account actually managed by Lazard. It is for illustrative purposes only and is not intended to reflect the performance of Lazard s Global Infrastructure strategy, the performance of which may differ. Performance quotes represents past performance. Past performance does not guarantee future results.