Stephen Bartholomeusz is agog:
Whether it is serendipity, good luck or good management, the timing of the Victorian Government’s sale of a 50-year lease over the Port of Melbourne has produced an extraordinary deluge of cash for the state.
Actually, it is probably a mix of the three.
The serendipitous element is that the protracted wrangling with the Opposition over the period of exclusivity that would be granted to the successful bidder delayed the actual bidding until what appears to be the perfect moment.
The good luck came with that timing, at a point where global interest rates and yields are at historically unprecedented levels and the hunger for positive returns, particularly from pension funds with their long-dated liabilities, is at extreme levels.
The good management came from the foresight of successive government to create a port – the largest in the country – with sufficient capacity to cope with increased container volumes that could be expected to be generated by the underlying longer-term growth in Victoria’s population and economy.
Of all of these factors the one that matters most to investors, the only one that matters in truth, is the second point. This deal is built on the assumption that the cost of capital has collapsed permanently. That the port was bought by patient capital, including 20% input from a Chinese sovereign wealth fund, rather than a business is key. The rate of return hurdle rate in this acquisition is below anything that any existing corporation would accept.
It was only possible because the purchasers accept and have access to the true cost of capital, which is zero, or might as well be. This has two implications:
- businesses that do not recognise this truth will fail to invest and their returns of equity will fall over time;
- businesses that do recognise it will prosper and will tend to be the deepest rent-seekers in the land, those with access to government capital;
- the only other kinds of businesses that will prosper on this horizontal rent-seeker’s plain will be those that are genuinely disrupting the first two.
In short, if you’re an investor looking for long term returns, seek out only those businesses that are either fair dinkum monopolies with access to cheap dough or fair dinkum disruptors that can rip out a higher return on equity by building a better mousetrap.
Everything else is going to whither away at zero.
