Infrastructure fund cost of capital
Hey all!
I was recently chatting with someone in the industry about Repsol selling part of its midstream business and the guy I was talking to said that "many times, companies cannot compete against a PE fund's cost of capital."
It might be a very simple answer, but if you could provide an insight as to what he meant by PE funds having "a lower cost of capital" and why this is the case, I would be very grateful.
Thanks!
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I find that comment to be strange, since PE funds in general probably have a higher return on equity threshold vs. strategics (who can usually always pay more due to synergies / strategic value), which is why when banks do their valuation football fields the "LBO" valuation is always the lowest. For generalist infra, it's typically in the 10-15% IRR target range, depending on how "risky" the business is, as compared to traditional PE where they underwrite to 20-25% IRR. But PE firms have an advantage in swift deal execution (better visibility to actually close the deal versus a strategic spinning its wheels forever, and faster DD), as well as ability to keep members of the original management team, since they're either getting axed in a strategic acquisition or will take on a diminished role. Not sure how that answers your question though.
part of it is newer wave infra funds that set to with core ie super core mandate and thereby have lower return hurdles. maybe another part is who has access to better financing renee and can therefore bid up the multiple, and tighten the unlevered yield, but still get good levered return by maintaining the spread on the cheaper financing
The risk profile on "core" assets is long-term, stable, stress-resistant etc., so the expected return profile and cost of capital as a result in arbitrage-free conditions (i.e. theoretical) is also low. I imagine that this person was referring to experienced, large AuM funds, where you could indeed use low cost of capital as shorthand for overall fund risk/return profile due to their access to a deep and wide liquidity pool among LPs and banks.
higher LTV too from IG rated cost of debt
Could you elaborate on that? What do you mean by higher LTV?
Loan to value - more leverage - because its a 'real' asset rather than a cash flow lend
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