Saturday, October 15, 2011


Biz Trusts with wrong incentive structure.

Base Fee
In effect, by doing share purchase.....
They are trying to nudge A up and bring C down, have been unsuccessful at D and know that they can't raise B becos the cost of equity is so much higher than the cost of debt at the ridiculous price MIIF (discount to NAV) is trading at.

Performance Fee
The only way they can bring the share price up (more correctly support the share price in a plunging bear market)  is by share purchase.

My Thots....
As a fund manager, their track record on "Buys" and "Sells"; on trading of assets is weak.
Check out their acquisition and divestments of Arqiva and CAC.
In one fell swoop, they negated all the profits made since IPO.
The acquisition and divestments were made to comply with the wishes and decisions made by fellow co-investors ( or some higher ups in the MacQ structure?)  who have their own calculations and motivations.

As a FoF (fund of fund), the basic U would expect from such an investment fund  is that they will buy when prices are down and sell when prices are up. They did the exact reverse.
Having sold in a distressed mkt, U would expect them to have better acquisitions in mind. Instead, they got stuck with cash they do not seem to be able to make better use of for the past yrs.
Failed to do due diligence when buying Miaoli windfarm : i.e. they bought a windfarm w/o much wind.
Somehow, the Big M name did not live to its reputation and the whole biz model of the M Group failed to deliver when under savage attack by Jim Chanos and his gang.

Management of MIIF should put shareholders first, not their siblings in the MacQ Group.
MIIF is one big lesson for me.
Divested, about breakeven, slightly underwater.
Needs plenty of patience and a bouyant equity mkt to recover.

Other Thots...

MAS should review Biz Funds Incentives & Structure too

MIIF remains opaque. altho it owns 81% of Hua Nan ,we do not know much about the loan structure.
 See Hua Nan slide 19, the senior debt is supposedly pegged at
5 year PBOC2 rate:
- 7.83% without 10% discount
- 7.05% with 10% discount
As the loan starts after acquistion  in 2007, and  the  interest rates(based on the above) are pegged at  5yrs PBOC rate, will the interest rates change?
And when? Every year ? Or every 5 yrs? Will it go up or down in 2012?
What instruments do they use to hedge this huge variability?
There is no update on this, since the acquisition.
 At the same time, slide 20, says there are no hedging mechanism for both forex and the interest rates in China.
So what are we to make of the latest results 2011 Interim presentation that maturity is 2022?
There is no info on whether how the Senior Note is structured .
Who subscribed for the Senior Notes?
Are there covenants?
Asset level debt is supposedly non-recouse at MIIF level.
Are there SPVs involved, what are they and how are they structured?
 MIIF has 81%, the vendors Topwise and Preciseway has 9% and the Guangzhou authorities 10%, so if anything go wrong with the Senior Notes, who is ultimately responsible .
Will MIIF be ultimately accountable; as with Miaoli; even tho the debt is non-recourse?

Some may argue that the incentive structure  for Performance Fees are aligned with unitholders interests.
True, but the fact is that after the sale of Arqiva, MIMAL has NOT matched Basic minimal performance expected of Infrastructure Fund.
Yes, the question is NOT Performance Fees, but whether MIMAL should even be paid Basic Fees.
MIIF's raison d'etre as an Infrastructure fund, is to do the basic of  researching and finding good long term Infrastructure assets and investing in  them to provide DCF; this they are not doing well as I will explain later.
MIIF has ended up as a short term trader of assets, destroying shareholder value in the process as they  incurred losses from their trades.
NIV is basically pegged to Market Cap (with Cash at hand end of yr and Borrowings as other side factors).
MIMAL,  it seems has "switched off " , focussed on using the cash for Daily Share buy backs to shore up Market Cap ( a no-win situation in a Bear Market);  which arguably could be better put to better use to acquire  good undervalued Infrastructure assets in a bear market.
MIMAL is sitting on the Cash Pile they hurriedly collected when they sold in the last distressed market (during the GFC) and  NOT putting it to use in the current bear mkt caused by the Eurozone crisis.
Yet, MIMAL is collecting the Base Fees, altho they are not doing what they are expected to do.
Isn't the incentive i.e. "Base Fees"----- not aligned to unitholders interests?
In fact, one may even argue that the cash be better spend as a dividend payout to long suffering unitholders, if they cannot be put to better use than share buybacks ( which is arguably a form of  leakage thru Base Fees).

MAS Review?
The reason I am revisiting this post is that I think that MAS should look into both the incentive structure for Biz Trusts; as well as the need for  more disclosure about the assets whereby the Biz Trusts has majority (>50% control) of the assets.
There is a strong case for making the Biz Trusts asset class more transparent .... less opaque.

see post at Valuebuddies forum


qiaofeng said...

Guy,s for more on this, U may want to visit

Let me explain my view here.
" My view, despite the management changes from Kerr to Stuart, MIIF role should be that of a funds allocator and manager i.e. looking for good assets, chiefly earning regular cashflow from these assets but not averse to making opportunistic capital gains; in the process hedging risks from debts and reducing expenses. IMHO, John Stuart did badly in the role I defined for him and I blame the incentive scheme.

MIIF is a fund managing and allocating monies entrusted by investors for investing in Infra.
MIIF should not be doing short term trading of assets as it has been doing. But, if presented with an opportunitic situation whereby MIIF can make a huge capital gain, management should not hesitate.

So I am against and not advocating "trading" of assets, the management role should be one of "investing" long term in assets that bring consistent and "durable/sustainable" cashflows.

I am also against management "trading" in MIIF's share in the short term to shore up Mkt Cap,in weak crisis driven mkt; when the $33-35m spent could be used for its core biz of investing in quality assets thru acquisition.

Buybacks in a crisis driven mkt can be used as a clarion signal that management consider that Mr Market is wrong on valuing MIIF, but in a persistent down trend driven by sentiment and other non-biz driven factors, it is more useful to use the cash hoard to buy "distressed" assets that have similarly fallen then buy Ur own shares.

This is the reason why Berkshire, almost never (except recently once with explanations given by Buffett) buy their own shares but prefer buying others assets in a distressed mkt.
IMHO, this is the correct role of an funds allocator.

qiaofeng said...

One of the forumers posted the reply from MIIF management as to why HNE which is 81% held by MIIF is not consolidated into MIIF's acct. The reply cited IAS 39, that HNE is a financial asset held for trading purposes. HNE is measured at fair value with fair value changes recognised in the statement of comprehensive income (P&L).

So MIMAL sees itself primarily as an "asset trader"; not as an investor who invest in infrastructure for steady defensive & durable recurrent cashflows.

Their record at trading assets is awful.
37.5% NAV was destroyed due to the trading of Arqiva & CAC.

Those thinking that MIIF in 2011 is radically different from MIIF in 2008 should be careful.

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