Hedge funds and Private Equity - PES

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3. Public sector and universal provision
of services of general interest
Recently the LBO funds have entered some traditional public utility industries that provide
basic infrastructure services for the economy, in particular airports and telecommunications
(telecom). Press reports indicate infrastructure operators in Europe will be high priority targets
over the next few years. The infrastructure industries – airports, ports, telecom, electricity, gas,
water, and parts of public transport – differ from general industry in several important ways:
the largest “incumbent” firms in the infrastructure sectors in any country typically have significant
monopoly power in their respective sectors over the provision of essential public
services;
they also carry important public service responsibilities (e.g. universal service obligations);
infrastructure providers are very capital-intensive, requiring significant and continuing longterm
investments in physical infrastructure assets, their maintenance and expansion;
they make extensive use of public rights-of-way and other public resources, the rights for
which have been granted at minimal or no cost, not market value;
they are subject to special government oversight with respect to their delivery of public services,
often by industry-specific regulatory authorities. This regulation is directed only to certain
services and markets of infrastructure operators, and does not extend to its financial structure
or ownership.
Historically in Europe these infrastructure operators have been owned by governments and
provided as public services. During the last 10-15 years many have been wholly or partly privatised
with a view to stimulating a degree of competition in national markets and facilitating the
development of European common markets (see table below). These infrastructure sectors are
still at an early stage of the transformation process from government public service monopolies
to private competitive markets, so that the services markets are still highly monopolized, requiring
direct regulation to ensure that monopoly power is not exploited and public service objectives
and standards are maintained.
As infrastructure operators are typically conservatively managed and generate significant stable
cash flows for reinvestment, they have characteristics that are especially attractive to LBO funds.
Private equity funds have increased their investments tenfold in state-owned companies
Year
Europe:
Millions in EUR 48
Globally:
Millions in EUR
Europe: Numbers
of transactions
Globally: Numbers
of transactions
2000 564 1129 14 17
2001 1623 1638 18 20
2002 1221 1473 11 14
2003 2088 2273 18 27
2004 7294 7650 18 30
2005 2336 2926 24 40
2006 5950 10671 22 46
TOTAL 21706 27760 125 194
Source: Published in Mandag Morgen the 22.nd of January 2007 based on figures from Thomson Financial
48 The exchange rate used is 100 EUR = 745,41 DKR. (source the 25th of January:
http://www.nationalbanken.dk/dndk/valuta.nsf/side/Valutakurser!OpenDocument)