Hedge funds and Private Equity - PES

3.1 The attractiveness of public utilities
The transitional position of many infrastructure operators between public sector and private
market operation makes many of them attractive to LBO funds looking for investment opportunities
in highly imperfect markets, especially if the infrastructure operator is fully privatised and the
management is receptive to a co-operative leverage buyout. The special considerations associated
with the use of public resources such as rights-of-way, special rights such as the power
of eminent domain and the provision of special obligations such as universal services raise a
particular risk of possible political intervention with respect to hostile takeovers.
Typical characteristics of infrastructure operators that LBO funds find attractive are the following:
significant stable cash flows from a customer base that considers the service a necessity and
has few, and sometimes no alternatives;
a significant degree of monopoly power in the primary market(s);
infrastructure providers do not maximise short-run profits because primary considerations in
decision making are given to long-term investment needs, stable financial structures and
public service responsibilities;
industry specific governance/regulation is limited to certain service performance objectives in
basic services and does not extend to ownership, financial policies, pricing for most services,
or profit control;
infrastructure providers use significant public resources and special rights (e.g., land, rightsof-way,
eminent domain, radio spectrum, etc.) that are undervalued, or even unvalued assets;
financial structures and policies are geared to risk-optimisation for long term investments in
capital intensive fixed assets; significant cash flows provide internally generated capital necessary
to meet ongoing long term investment requirements in infrastructure assets;
infrastructure operators are typically characterised by conservative management, often carried
over from the prior government service model, and management policies and practices of
largely untested and varying efficiency;
public stockholders attracted to infrastructure providers have been investors looking for a
stable long term return with regular dividends and reduced market risk.
The attraction to Private Equity Funds of each of these individual characteristics of infrastructure
operators will vary depending on individual circumstances, but collectively they demonstrate that
infrastructure operators are likely to become more significant targets in the future as the privatisation
of publicly owned infrastructure continues and the scrutiny of infrastructure operators by
Private Equity Funds deepens. For Private Equity Funds, the market risks of infrastructure operator
takeovers are relatively small and the possibilities for enormous financial gains are great.
Most infrastructure managers are likely to be receptive to bids given their custodial management
style, the diversity and relative passivity of the public stock ownership, and the possibilities for
large personal gains for the management. A more serious risk is whether the Private Equity
Funds are likely to provoke political responses to their plans from concerns about the implications
for the long-term development of public infrastructure services.
Part II – Six concerns about our European social market economy
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