Private Equity Turns to Infrastructure
Private equity firms are following in the footsteps of Macquarie Group and the investment units at top investment banks like Goldman Sachs, JPMorgan and Morgan Stanley. According to Pensions & Investments, they are shifting gears to focus on a new area: infrastructure investing. The report argues the credit crisis and recession have put the traditional leveraged buyout businesses into “suspended animation.” P&I adds that right now some of the biggest names in the private equity field — Carlyle Group, Kohlberg Kravis Roberts and Blackstone Group — are raising infrastructure funds that can deploy large amounts of capital.
“Infrastructure is a rapidly evolving asset class,” P&I quotes Kathryn Leaf Wilmes, Principal in the infrastructure business of Pantheon Ventures Inc., a San Francisco-based private equity fund of funds manager, as saying. “In 2006, there were a number of bank-sponsored funds … that came to market. Most recently, traditional private equity groups are sponsoring infrastructure vehicles,” said Wilmes.
PE Firms Eyeing Infrastructure
Between $120 billion and $170 billion has been raised by global infrastructure funds over the past two years, according to P&I, citing Ernst & Young estimates. Today, the economic slowdown is driving renewed interest in U.S. infrastructure. As Pensions & Investments states, “In the past two years, most of the dollars raised for infrastructure funds have been invested outside of the United States , but the credit crisis is pushing states to enact legislation that would enable infrastructure funds to invest in large domestic projects, opening up the U.S. market.”
So which PE firms are starting infrastructure businesses? Carlyle raised a $1 billion fund last year, according to P&I. The firm also partnered with Riverstone Group, closing two funds in 2007 with a combined $4.5 billion for energy-related infrastructure. KKR also started its global infrastructure investment business in May 2008. P&I adds the firm is seeking to raise $4 billion for the KKR Infrastructure Fund, citing research from Preqin Ltd., a London-based alternative investment research firm.
P&I says Blackstone is marketing its first infrastructure fund, Blackstone Infrastructure Partners, for which officials hope to raise $3 billion to $5 billion. Also Neuberger Berman Group LLC, New York , restarted the infrastructure investment unit that former parent Lehman Brothers started building before the bank went bankrupt last September. P&I reports that Emil W. Henry Jr., a former Assistant Treasury Secretary who joined Lehman Brothers in July 2007, is preparing to raise money for a new Neuberger Berman fund this year, citing sources familiar with the matter.
A slew of other private equity firms are also starting infrastructure businesses, notes P&I, including Oaktree Capital Management LP, 3i PLC, Madison Dearborn Partners LLC, First Reserve Corp., Lone Star Funds, Charterhouse Capital Partners, Park Square Capital LLP and Cinven.
Infrastructure Funding Gap Leaves Room for PPPs
Consultants and investment executives say infrastructure investing fits hard economic times and there is a flight to quality to investment-grade stable assets, reports P&I.
A report co-published by the Urban Land Institute and Ernst & Young contends that privatization is the only way to bridge a $170 billion annual funding gap. “It is increasingly clear that the infrastructure funding gap will need to be addressed with public-private partnerships,” says Dale Reiss, Global Director of Real Estate at Ernst & Young in New York City. “If the U.S. fails to embrace this model, it could lead to our economy falling behind more of our global competitors.” The study however warns that “political will may only emerge when people face imminent reward or immediate risk.” P&I quotes Mike Lucki, Ernst & Young’s Global Infrastructure Leader, as saying, “People need a burning bridge before they act and the bridge is burning.”
Traditional methods of financing infrastructure - such as tax revenue and municipal bonds - will fall far short of funding the mounting infrastructure needs in the U.S. Moreover, the infrastructure dollars set aside in the economic stimulus package are barely enough to fill potholes, P&I quotes Lucki as saying. This shortfall leaves room for infrastructure fund investments through public-private partnerships or PPPs (P3s). These projects — such as bridges or toll roads — are monopolistic, making for steady cash flows leading to steady and reliable returns, Lucki said.
PPPs: a Political Reality?
Looking ahead, Washington D.C. based consulting firm, CG/LA Norman Anderson, predicts global infrastructure spending will jump 0.7% this year (or increase by an additional $280 billion), according to Infrastructure Investor. The report adds CG/LA foresees the U.S. will carry out roughly $190 billion in infrastructure spending. The firm also believes that President-Elect Obama’s proposed Infrastructure Bank will become a reality.
Representative Rosa DeLauro, (D-CT) recently introduced a bill to establish a national infrastructure development bank that would use public and private capital to fund projects of regional and national significance. These are projects that are badly needed and would be a boon to employment.
“By expanding and enhancing existing infrastructure through a National Infrastructure Development Bank we can leverage private sector dollars to invest in our most critical transportation, environmental, energy and telecommunications infrastructure needs,” said Congresswoman DeLauro.
DeLauro’s plan would give the final approval over which transportation, energy and telecom projects receive assistance from the development bank to an independent board of directors. Separate risk management and audit committees would oversee the bank’s balance sheet, which would get a $5 billion annual infusion of taxpayer money to help attract more capital from private investors. The bill has 27 Democratic co-sponsors in the House. Transportation Secretary Ray LaHood has already voiced his support for the bank. It has also won the support of the U.S. Chamber of Commerce and the AFL-CIO.
On the state level, New York Governor, David Paterson, recently announced his approval of the creation of a State Asset Maximization Board - a move he believes will lead to ‘huge projects’ and invite private equity firms, pension funds and developers to invest in the state’s crumbling infrastructure. “This crisis may open an opportunity for us to find a solution . . . and that solution we see as public-private partnerships,” says Gov. Paterson.
Paterson accepted the final report from the New York State Commission on Asset Maximization which was charged with broadly examining whether asset maximization can benefit the State, as well as whether any specific New York assets are suitable candidates for Public-Private Partnerships (PPPs).
The final report contains 27 major recommendations to help create jobs, generate economic activity and benefit colleges and universities across New York State. The report also recommends the creation of a State Asset Maximization Board to screen, oversee and implement PPPs.
The commission also outlined specific project ideas that could be effective long-term projects, including: school construction and renovation in Syracuse and Yonkers; 300 bridge renovations in all corners of the State; wind power on the Great Lakes; and high speed rail.
To push PPPs in New York, Paterson expressed support for the board to proceed with several “small projects that will lead to huge projects” when the economy recovers. The successful completion of these smaller projects would “empower” the state to advance larger “mega-projects” such as the $14 billion proposed replacement of the Tappan Zee Bridge over the Hudson River, according to the commission.
Executive search firm, A.E. Feldman, contends that these developments promise to create opportunities in project and infrastructure finance. The firm says infrastructure finance jobs are likely to open up for candidates with backgrounds in investment banking as well as experience in analyzing and executing structured financings. The most sought after candidates have been those with experience in infrastructure transactions and civic engineering.
Are you working in Project & Infrastructure Finance?
If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
