Bye-bye buyouts; hello to raising infrastructure funds

Private-equity firms are turning to infrastructure investing now that the credit crisis and deepening recession have put their traditional leveraged-buyout businesses into suspended animation.
JUN 07, 2009
Private-equity firms are turning to infrastructure investing now that the credit crisis and deepening recession have put their traditional leveraged-buyout businesses into suspended animation. Some of the biggest names in the private-equity field — The Carlyle Group, Kohlberg Kravis Roberts & Co. and The Blackstone Group — are raising infrastructure funds that can deploy large amounts of capital. Between $120 billion and $170 billion has been raised by global infrastructure funds during the past two years, according to estimates from New York-based Ernst & Young LLP. “Infrastructure is a rapidly evolving asset class,” said Kathryn Leaf Wilmes, a principal in the infrastructure business of Pantheon Ventures Inc., a San Francisco-based private-equity fund-of-funds manager. “In 2006, there were a number of bank-sponsored funds ... that came to market. Most recently, traditional private-equity groups are sponsoring infrastructure vehicles,” Ms. Wilmes said. Private-equity firms with infrastructure funds in the market today tend to have experience investing in infrastructure or infrastructure-related assets, she said. Their executives learned hard lessons during the infrastructure bubble years of 2006 to 2008. For example, ports and toll roads are more sensitive to economic growth. Most of the dollars raised for infrastructure funds over the past two years were invested outside the United States. But the credit crisis is pushing states to enact legislation that would allow infrastructure funds to invest in large domestic projects, opening up the U.S. market. Carlyle — the first private-equity firm to diversify into infrastructure — raised a $1 billion fund last year. The Washington-based firm also entered into a partnership with Riverstone Holdings LLC of New York, closing two funds in 2007 with a combined $4.5 billion for energy-related infrastructure. However, Carlyle has been seeking to become a diversified-asset-management shop almost from its inception. KKR of New York started its global-infrastructure-investment business in May 2008. The firm is seeking to raise $4 billion for the KKR Infrastructure Fund, according to Preqin Ltd., a London-based alternative-investment research firm. New York-based Blackstone is marketing its first infrastructure fund, Blackstone Infrastructure Partners, for which officials hope to raise $3 billion to $5 billion. Elsewhere, Neuberger Berman Group LLC of New York has restarted the infrastructure investment unit that former parent Lehman Brothers Holdings Inc. started building before the bank filed for bankruptcy protection in September and is preparing to raise money for a new Neuberger Berman fund this year, sources said. Other private-equity firms starting infrastructure businesses include Charterhouse Capital Partners, Cinven, First Reserve Corp., Lone Star Funds, Madison Dearborn, Oaktree Capital Management LP, Park Square Capital LLP and 3i PLC, sources said. Meanwhile, pension funds increasingly are establishing infrastructure allocations. For example, the $49.7 billion Ohio State Teachers Retirement System in Columbus is adding a 5% target allocation that will include commodities, infrastructure and natural resources. Also, the $179.7 billion California Public Employees' Retirement System in Sacramento is investing in infrastructure as part of its 5% allocation to an inflation-linked asset class. Consultants and investment executives said that infrastructure investing fits hard economic times, and there is a flight to quality to investment-grade stable assets. Traditional methods of financing infrastructure — such as municipal bonds — won't fill the estimated $2.2 trillion of need nationwide. In the United States, the infrastructure dollars set aside in the economic-stimulus package are barely enough to fill potholes, said Mike Lucki, the global infrastructure leader with Ernst & Young. This shortfall leaves room for infrastructure fund investments through public-private partnerships, he said. Some previous public-private partnerships in the United States failed due to political pressure. In Texas, cost concerns spurred the state to place a moratorium on such partnerships. The moratorium is scheduled to end in a couple of months. These problems are part of maturing, said Vittorio Lacagnina, chief operating officer of New York-based SteelRiver Infrastructure Partners LP, the $1.9 billion North American infrastructure business spun out of the soon-to-be-defunct Babcock & Brown Ltd. of Sydney, Australia. Arleen Jacobius is a reporter for sister publication Pensions & Investments.

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