PE and Infrastructure/Utilities Deals
Can someone help me understand why the traditional LBO shops don't do infrastructure deals? I would think that infrastructure and utilities companies (despite little growth) would generate very steady returns that would be good to lever up. Thanks!
bump
I don't really know, so if anyone wants to critique my answer, they are welcome to do it.
It has to do with the exit of the investment. Certainly leveraging a company with strong cash flows is an easy sell, but only certain investors can invest in infrastructure and utility companies due to either size or legal reasons. In addition, it's a market that is heavily government spending dependent, and that is where not many people are willing to invest.
One reason is that it's simply a different sector. Similar to how a manufacturing PE fund doesn't do tech deals, most corporate focused funds (be they manufacturing or tech) don't do infrastructure. There's the network of being able to source the deals and depending on what they are, an engineering focus to understand them or for something like an airport the knowledge on how airports operate. It's also most likely in the fund docs that they can invest in manufacturing, business services, widgets, etc but are prohibited from investing in infrastructure and real estate. LP's like to invest in funds with a limited scope for various reasons that I won't get into. That's why at least some of the MF's have specific infrastructure funds that invest only in infrastructure.
And depending on what the infrastructure is, you can usually leverage the tits off of it. This is going back about 10 years but I knew a guy at Macquarie who directly invested in infrastructure and they'd get over 100% leverage because the asssets had such strong and long term cash flows that they could get tons of leverage. They were also early infrastructure investors and the debt markets were very frothy. I have no idea if that's true now because the space has become more crowded and debt has cooled off from them.
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