Value Propositions behind the Interest of Equity Firms in Transport Terminals

Value Propositions behind the Interest of Equity Firms in Transport Terminals

Source: adapted from Rodrigue, J-P, T. Notteboom and A. Pallis (2010) “The Financialization of the Terminal and Port Industry: Rediscovering Risk”, International Association of Maritime Economists.

The rationale for the growing involvement of the financial sector in port terminals is mainly that terminals are increasingly capital-intensive since the asset has an intrinsic and operational value. The substantial levels of productivity brought by containerization have resulted in a much more capital-intensive industry depending on financing not just for asset acquisition but also for their operations. Since terminals occupy strategic waterfront locations, their value as real estate assets is expected to increase. In turn, there is the expectation that terminals are relatively liquid assets, implying that they can be sold and a buyer readily found. However, such an expectation can change rapidly in periods of recession, where terminal assets can become rather illiquid. The amortization of investments tends to occur over longer time periods, implying a more direct involvement and oversight of financial firms. Terminals in landlord ports became particularly attractive investments because land lease arrangements in these ports allow investors to acquire exclusive user rights on prime port sites for the entire duration of the lease term, typically between 25 and 40 years for larger terminals.

With the growth of international trade, the volume handled by terminals grew accordingly, and with it, their revenue. This attracted the attention of financial firms, such as banks, insurance companies, and even pension funds, seeing transportation assets, such as port terminals, as an investment class part of a diversified global portfolio permitting risk mitigation. Pension funds became interested in terminal assets because the time horizon of an investment, such as a concession agreement, corresponded to their time horizon, which is long-term. This helped to provide large quantities of capital to develop intermodal assets and increase their value. Scale factors were also important. Global financial firms were looking at opportunities large enough to accommodate the vast quantities of capital at their disposal, and terminals represented an asset class that suited the scale of this allocation well. Therefore, both the capital time and scale prospects of the maritime industry were in synchronism with the prospects of the financial industry. With the growth of international trade, transactions between commercial actors became increasingly complex and reliant on financing.