Chap 11 - Other Real Assets Flashcards
In theory, the correlations between the returns of firms and price changes for their associated goods are driven by three primary factors: the price elasticity of the demand for the good, the price elasticity of the supply of the good, and the extent to which an operating firm is exposed to or has hedged changes in its profits.
There are sound economic reasons to believe that the market prices of firms that provide goods and services related to the extraction and processing of natural resources should be substantially correlated with the prices of the natural resources themselves or the commodities that emanate from the processing. The reasoning is that a dramatic rise in the price of a commodity, such as a metal or an agricultural product, indicates that demand vastly exceeded supply at the previous price. The relatively high demand for a commodity should generally coincide with increased demand for the services of firms that process those commodities.
But in reality, the firms don’t perform as the commodities. For example, from 2002 to 2012, the price of gold sixfolded (x6) but gold mining firms only tripled. Also, commodities help investors to hedge and protect their portfolios in times of panic, while firms opreating commodities have similar returns to the market in the same periods. Thus, in the short run, it appears that the publicly traded firms related to gold production are driven more by the volatility of the equity markets than by the volatility of gold prices.
The oil and gas sector is divided into upstream, midstream, and downstream operations. What are they ?
Upstream operations focus on exploration and production; midstream operations focus on storing and transporting the oil and gas; and downstream operations focus on refining, distributing, and marketing the oil and gas. Midstream operations and
midstream MLPs—the largest of the three segments—process, store, and transport energy and tend to have little or no commodity price risk.
What are the three types of major U.S. business entities ?
Taxable corporations (C corporations), tax-exempt corporations (investment companies), and limited partnerships.
Investors in the equity of traditional operating corporations (C corp) in the United States experience double taxation. Double taxation is the application of income taxes twice: taxation of profits at the corporate income tax level and taxation of distributions at the individual income tax level.
Limited partnerships in general and MLPs in particular are not directly subject to income taxes at the partnership level. The revenues, expenses, and profits of the partnerships flow directly through the partnerships and into the tax forms of the partners. The limited partners are subject to tax on profits that flow from the partnership, whether or not the profits are distributed to them. So to avoid paying corporate income taxes they distribute almost all of their profits to the corporation’s shareholders
These benefits manifest themselves in the ability of limited investors to enjoy large tax-free distributions, because it is income that is taxed, not distributions. Many of the large distributions from MLPs are sheltered in the short run as return of capital due to generous rules regarding the expensing of costs. Return of capital distributions are tax-free when received. Distributions that represent return of capital serve to lower the tax basis of the MLP investment to the investor.
What are the 7 primary characteristics of Investable infrastructure ?
Investable infrastructure is typically differentiated from other assets with seven primary characteristics:
(1) public use, (2) monopolistic power, (3) government related, (4) essential, (5) cash generating, (6) conducive to privatization of control, and (7) capital intensive with long-term horizons
Investable infrastructure can originate as a new, yet-to-be-constructed project, referred to as a greenfield project, that was designed to be investable. Investable infrastructure can also be an existing project, or brownfield project, that has a history of operations and may have converted from a government asset into something privately investable. New projects may be funded by private capital rather than through government control and financing in order to promote efficiency and enable construction without straining government resources. Existing projects are converted to investable infrastructure primarily to raise capital for government and to earn cash flow for private investors.
What is The critical property of infrastructure ?
The critical property of infrastructure (i.e., the most important distinction between investable infrastructure and traditional investments) is in the nature of the revenues, with investable infrastructure generating a cash flow stream in a monopolistic environment rather than in a competitive environment. An investment in infrastructure generally relies on the purchase or long-term lease of a facility that generates stable cash flows, ideally growing with the rate of inflation.
What is Economic infrastructure ?
Economic infrastructure assets are assets with economic value that is driven by the revenue they generate, typically with end users paying for the services provided by these assets.
What are Social infrastructure ?
Social infrastructure assets are assets that have end users who are unable to pay for the services or that are used in such a way that it is difficult to determine how many services were used by each person; examples include schools, public roads, prisons, administrative offices, and other government buildings.
What is privatization ?
Many existing infrastructure assets were built with public funds and then sold into the private sector. When a governmental entity sells a public asset to a private operator, this is termed privatization.
What is a public-private partnership (PPP) ?
A public-private partnership (PPP) is a collaboration between public bodies, governments, and the private sector that occurs when a private-sector party is retained to design, build, operate, or maintain a public building (e.g., a hospital), for a lease payment with a finite time. Popular are leases or concessions wherein the government leases an asset to a private operator for 20 to 99 years, with the full equity interest in the facility reverting to public ownership at the end of the concession term.
Private-sector participation in economic infrastructure relies on a government that is content with essential assets being operated by the private sector, which charges citizens for its services (often within a regulated pricing structure). It also relies on customers’ propensity to pay.
Private investment in social infrastructure depends both on the government’s ability to pay the private sector for the service and on the government’s political support for the PPP.
What is Regulated pricing ?
Regulated pricing occurs in most countries and the pricing for goods and services deemed essential is largely determined by price changes that must be approved by public entities and are most common in the energy sector. There is a growing trend toward unregulated pricing of certain infrastructure investments in mature countries.
What is Regulatory risk ?
Regulatory risk is the economic dispersion to an investor from uncertainty regarding governmental regulatory actions and includes uncertain regulation regarding the initiation of a project or its operation.
What is Political infrastructure ?
Political infrastructure risk includes regulatory risk and nonregulatory risks, such as the risk of expropriation. In developing countries, political infrastructure risk is a key consideration given the essential nature of the assets to the local economy, the long life of the assets, and the fact that they cannot be moved, making them vulnerable to expropriation. To mitigate this risk, many investors target only developed countries or developing countries with robust legal frameworks.
