Insight
On the right track with short-line rail
January 27, 2021
In the game Monopoly, the property names all come from real places in Atlantic City, New Jersey. You might remember that four of the properties are railroads, and that one is the “Short Line Railroad”. This name is an exception because there was no Short Line Railroad in Atlantic City. The name is a contraction of “Shore Fast Line”, a railroad that did run there in the first half of the twentieth century.
In the business world, short-line railroads are the small stretches of track that spur off the main national networks. Typically, they provide first- and last-mile rail transportation and storage for their customers. There are about 550 of these short lines in the US and 60 or so in Canada, and they are usually privately owned. In 2019, the Private Client Infrastructure Portfolio joined with a team of seasoned operators in this space and purchased its first short-line rail asset in Sarnia, Ontario. Early experience in operating this asset has been positive, with financial results exceeding base case expectations.
In August 2020, the portfolio bought its second and third short-line rail assets in Louisiana and Texas, expanding the Private Client Infrastructure Portfolio’s geographic scope and further diversifying its overall portfolio of infrastructure investments.
Short-line rail assets occupy entrenched positions with their customers and produce strong and stable cash profits. Rail is also a business that requires active management and, in return, can experience growing profits over time as well as provide protection against inflation.
Even with the challenges of running a business during the COVID-19 pandemic, the short-line rail assets have proven to be resilient investments, due in part to short-line rail’s persistent, defensible characteristics. These include providing essential services to well-established, large-scale customers; operating in resilient markets with high barriers to entry; and having strong customer relationships, often with contracted revenues.
Infrastructure, along with real estate and private loans, are alternative assets that, where appropriate, comprise a modest part of our clients’ well-diversified investment portfolios. They can help improve the balance between the returns achieved by the portfolios and the risk required to generate those returns—which can be even more rewarding than playing monopoly and winning second prize in a beauty contest.
This post is for information only and is not intended as investment advice. The views expressed are those of the author at the time of publication and are subject to change at any time.
