Confused about Infra PE
Hi, this may be a dumb question but Infra PE confuses me a lot. The sector seems quite interesting so I want to learn more about it but I've read through the M&I, WSO and other online sources and I find it all really confusing.
Something mentioned a lot online is that Infra PE you're not actually acquiring companies/assets, you're instead purchasing contracts and or financing projects so your financial modelling is based about valuing these contracts/projects rather than businesses/companies themselves. I find this confusing and was hoping someone could explain?
Infra PE also seems a lot different from RE PE wherein RE you acquire a property and rent it out to generate cash flows and then you value this asset which is pretty much how corporate PE works.. but Infra PE sounds a lot more complex and different.
Could someone please help me understand this? Thanks
I work in telecom infra PE. It may be different than other infra PE, but I will give you my perspective.
It is a bit more complex because these projects are funded off-balance sheet. This means that the project is an SPV (special purpose vehicle) that has its own equity and its own debt unrelated to the corporate sponsor's balance sheet. The project company (SPV), or as we call it, since we do public private partnerships, the P3NewCo, is a separate entity only connected to those with whom it is borrowing (not the corporate sponsor). This is not dissimilar to the LBO structure. What is dissimilar, is the ownership of the asset.
In our cases, the construction is funded by the investor, the operations are undertaken by the SPV, but the city ultimately owns the asset. Since the asset value = 0, to the investor, at the end of the concession, their goal is to generate a high IRR and NPV for the duration of the concession (10-100 years).
Depending on the type of concession (assuming low-risk to high-risk for the fund as you move down the list) there are six possible actions:
Design (D)
Build (B)
Finance (F)
Maintain (M)
Operate (O)
Own (OWN)
The more responsibilities the infra player takes down the list, the more the project becomes private. If you OWN the project (as a private entity), you are also responsible for DBFMO. That is not true in reverse (in the case where the city/state/country owns the asset). Many infra PE players will fund the EPC (engineering, procurement, and construction) which includes (D&B), hire people to run the P3NewCo / SPV (M&O), raise debt (F), but will not (OWN) the asset. They evaluate the project based on financing and cash flows.
Furthermore, these projects involve non-recourse financing. This means that the lender can only draw repayment from the profit / CF of the project, not from the assets of the borrower (hence the separation as a legal entity). This involves a higher-level of risk, and a bit more complicated debt structure. Since the non-recourse financing is inherently riskier, they are looking for committed off-take agreements, as I believe someone said above, with investment-grade purchasers of your product. Since we are in telecom, we will negotiate with public companies to commit to an off-take agreement of internet-to-the-home. The guaranteed revenues v. the proposed size of the project greatly greatly influence the leverage ratio as well as the cost of debt. There are more precise metrics, of course, but it roughly comes down to that.
Projects are usually levered at least 50% and up to 80%. This level of risk wouldn't normally be acceptable to creditors (since there is no balance sheet). This is why the existence of off-take agreements with investment-grade purchasers is so important. The off-take agreements act as a means to de-risk the project (acting somewhat as collateral / as a balance sheet). Without these the leverage ratio would likely dip below 50% and require much more equity.
TLDR: Depending on the vertical, it is more complex in terms of financing, specifically the debt; However, it is not outside the realm of any other type of PE; Take the WallStreetPrep course if you are interested.