Q&A - Infrastructure PE & IBD

I have worked with many model audit teams, mostly with the Big 4.

The boutiques are better respected, but, in general, I have never seen someone make the shift to IBD. Only the shift from IBD to model audit

I think to make it work you’d need luck and a really solid relationship with a banking client

People think model auditors lack some of the critical thinking IBD requires, so that’s the main hurdle

Infra funds targets 8-high teens IRRs. PE buyout shops are usually 15%+ so I’ve heard

My firm has a whole quant team trying to answer exactly that, which is they don’t but it depends on the specific sub sector. Infra has a lower beta than the market and can be defensive. Macro plays

Not so many BD guys, but bigger outfits might have some “sector experts” or “operating partners.” Eventually I will become a sort of sector expert and have built up my network there. Or use bankers for intros

Deal flow is a lot of M&A from other financials. More sophisticated pensions will trade infra portfolio companies too. Government privatizations had their heyday but slowed down. Utility take privates are going off right now too

I’ve been happy with my comp. MM PE is a decent gauge, but can be pretty high up at like a Blackstone.

I’ve liked infra. I always thought it was easier to wrap my head around a tangible toll road than something like a tech company

Infra is generally forgiving and creative with non traditional backgrounds. I think there’s a way to spin REITs as infra related. You can REIT telecom towers, roads, rail, you name it. Or social infra (schools, hospitals, parking lots, prisons, etc) could be a good segue

I would say first infra is trying to be “green,” so we generally don’t like energy associations :) But yeah I like transportation more than power, although my top three favorite types of power generation are landfill gas, nuclear, and waste-to-energy haha

Infra banks have their own ranking system. There are a lot of boutiques that also dominate the infra space too. Well respected shops are Macquarie (crap pay, amazing learning experience), Evercore, RBC

I’m in INFIN and Women’s Infrastructure Network. You meet a lot of people through conferences or banking client events, though.

Infra has a lot of dry powder and returns are tight, so it’s getting to normal PE hours for a lot of the good groups. However, given that the infra crowd can be on the quirky side and shit like roads are not sexy, you have a pretty good group working in the space. It’s also still a relatively small space too, so you have a great chance starting junior to make good connections

Direct investing is very competitive so it’s gotten repetitive/cookie cutter in terms of day-to-day and you’re getting more finance bro-y types who alter the culture

Funds in the space only started ~10 years ago. A lot of funds are at a good time for secondaries. Infra deals are frustratingly unique, infra folks have always been able to get creative, so there’s a lot of opportunity to do interesting deals in secondaries. The deals I’ve seen so far are anything but the standard mid-life LP stake buyouts

I think another big differentiating factor is deal time. A direct infra deal can be 9 mos to multiple years from start to close. Secondaries deals are faster. Some of the secondaries PE guys I work with have done a deal from start to finish in 2 weeks

In directs, you know 100% about 30 companies in your career. In secondaries, you’ll learn 30-40% about hundreds of companies. That level of variation in my work was appealing, too

I got bored and burnt out, took three months off work, then made a switch to secondaries for the hours and the work being more interesting imo

Battery storage right now is being deployed at utilities and isn’t a standalone investment yet.

The market needs to develop more and the technologies are still expensive.

The key things to think about with batteries are infra investors are always thinking LT (think 25 years plus). We are hesitant to invest millions of dollars in companies that haven’t been around that long and may not be in the future. There are also too many different technologies out right now and we don’t know which ones will prevail. We also don’t want to bet on someone now and when those batteries need maintenance 10 years from now, no one is around to service them because they had a niche technology and they went bust.

I think the market will work itself out as we need batteries soon. The push for renewables means less grid stability with rising power loads, so you need a battery to help capture the renewable power that’s generated unreliably to smooth it out. Right now the main use for batteries is peak load shaving, which is a good cost saving measure, but it’s more of a nice to have and not a necessity yet.

That got real jargony, so let me know if I can clarify anything

Asia has been booming and everyone's rushing to open an Asian office, mostly in Hong Kong or Singapore. Some people will also jointly cover the Middle East out of their Asia office. Some places will cover Asia out of an Australian office. A lot of the deals are in India right now. A lot of LPs are Asian too, further justifying establishing a presence.

I've mostly covered the Americas, so can't speak to any Asia-only shops, but check out IFM, Macquarie, GIC, or several Canadian pension funds. These places have US presences that I've seen staff up Asian offices from their US/CAN staff.

While there's some push to get local staff, most funds in Asia are early stage so they'll just take whoever wants to move.

I worked in an investment bank in the infrastructure coverage group on a team called Government Advisory for about a year before that team dissolved and everyone was just doing infra M&A. Our goal was to advise governments on doing P3s and running their processes from the sellside; main work products being a Value for Money analysis, a full P3 shadow bid model to determine either the availability payment cap or subsidy cap, and drafting the RFQs and RFPs.

It's been a while since I've done P3s and the market has likely changed a bit, especially in terms of deal size. I think you could probably swap public finance for project finance.

But I think project finance now is dominated by the consulting firm advisory arms and independent shops like PFI. People at those shops will have muni experience too, so you're not alone, and the debt is important in these deals given they're likely 90% levered.

I would choose Project fin over PubFin, but my interest in the debt markets is weak. Project Fin gets you across the capital structure and it's more than just models, which I like. It is a little more consultant-y though, if that suits you.

Fixed-life fund - a fund primarily makes money earning management fees and carry. You care about raising funds, deploying funds quickly / within the investment time period in the LPA, and exiting at big multiples to earn carry. You obviously want quality assets, but there's a balance to be struck with quality v. what's available when you must deploy. The culture is more PE-like. I liked some of the cyclicality of the business (natural ebbs and flows so you can take vacation). I disliked not always caring about trying to do what's best for the company or running out of time to execute business plans.

Pension / sovereign wealth - there's limited pressure or desire to sell and you're not trying to earn fees or carry. Your comp is based on the yield from the assets, so there's focus on deploying pensioner money in good assets when it makes sense. Pensions have deployment targets, but I find it's ok to not meet the target if the investment teams feel it's really not a good market. Pensions also tend to have lower costs of capital. You have to consider your deal IRR, how it will affect the makeup of the whole infra portfolio, and how it compares to the pension liabilities. Is this deal good for pensions? is a constant question. The culture can be more thoughtful and creative. At a pension, there are no ebbs and flows. When you're not on a deal, you need to be actively working on your portfolio companies. Because you're always adding assets and never really selling, your asset management portfolio is growing and they usually don't add people fast enough. I loved and hated the asset management. I liked being boots on the ground at the companies doing more creative problem solving (renegotiating PPAs, contract renegotiations with governments, working with a utility to decide what type of new generation to build, lifecycle capex planning). If I had seen a path to, I would have been interested to stay at the pension and only do asset management. Dislikes are the never-ending onslaught of asset management, even when on a deal (I pulled all of my real all nighters at the pension and not at the fund or banking, often times many days consecutively) and pensions can be quite bureacratic and bloated at the top, so it can make seeing a path to progress challenging.

For sure, I don’t know of many big name pure value add play funds, but everyone is definitely dabbling in that risk spectrum for the reasons you describe.

I started off my career doing availability payment toll roads and my last direct deal at the pension was aircraft leasing, so I think that’s a good indicator of where the infra market is headed.

I also think there will be a valuation reset at some point, as the market can’t go on like this. Interesting to see who still pursues value add versus coming back to more core/core plus

Another consideration is LPs— at my current fund, we’ve been hit with some LPs who think our returns are too high, as we’ve done some value add deals plus some general outperformance. They see it as increased risk over traditional infra. And if your risk proposition isn’t what they expected, they might as well move their money to traditional buyouts.

Hi,

Most of the best courses are paid... if you want to go down the paid route I would recommend either Corality's Advanced Project Finance Modelling course or perhaps a paid course from a specialist shop. Otherwise you can find some nice free materials online via Corality /F1F9.

The below link is a very useful resource too as they provide an example model, videos, and a presentation that explains the modelling specifics (and best practices) alongside the Project Finance essentials. Honestly if you follow through this course start to finish you'll probably know 80% of what you need to know to hit the ground running in my opinion. They also include techniques that even many experienced modelers haven't mastered, things like utilizing VBA User Defined Functions (UDFs) to solve circular references (for things like interest during construction and DSRA modelling), opposed to using iterative calculations, or annoying copy-paste macros that kill the model's ability to run sensitivities dynamically.

http://edbodmer.com/project-finance-exercises/a-z-project-finace-on-lin…

I would also recommend this free e-book from F1F9 on model optimization (this is up their with the quality of the most expensive paid courses). Also check out some of the other free ebooks on their website!

https://www.f1f9.com/resources/essential-model-optimisation

Funnily enough, the main way I learned to model PPP / Infra assets was through the interview process itself. Pretty much every Equity Investor / PE fund will require you to sit a modelling test as part of their recruitment process, if you can get your hands on some of these tests you can practice building out simple models from scratch and learn on the go! Please feel free to give me a PM and I can share some materials with you. Including a modelling test I built myself for recruitment purposes.

Transport can take a hit but I wouldn’t say it’s a given.

If you’ve got a road who’s traffic primarily takes people from the suburbs to jobs downtown, absolutely they’re obliterated. If you have a road whose primary traffic is delivery trucks transporting from logistic centers to housing, I bet you those are up and doing quite well. Likewise, ports and rail volumes have maintained steady, especially as China comes back up. Traffic mix is key.

Why would a utility suffer? Are people going to stop using electricity, water, etc? No. Public equities are not a good indicator of infrastructure performance and I bet you more take privates are coming up, since most pure infrastructure investors see a good discount. The biggest driving factor for a utility will always be the regulator.

Infrastructure is meant to sit somewhere above debt but below buyout traditional PE, risk-wise; less correlation to GDP and an inflation hedge but still potential for some outperformance.

The first thing to get under your belt is the investment thesis for infra and why you specifically like infra, if that's the career path you want to explore. Start broad and work your way to honing in on the specifics (i.e. going from 'why infra' to 'why midstream').

Why are infrastructure's returns what they are (meaning, they're higher than debt but lower than traditional buyout PE-- why?)?

Once you identify what makes something infra (and also understand how that makes it different from other asset classes) then the next question is why do you like those?

Besides talking to people in the space and reading forums like this, academics have started trying to pin down what is infra and why is it appealing. Some places that have good basic materials to read through are EDHEC Infra (they are trying to compile data on private infra investments to help quantify performance benchmarks), NYU (Stern has a professor that studies infra as an investment class), Meketa (they've recently released an infra 101 white paper), and infra funds websites (doing a quick search on my own, JP Morgan, John Hancock are top ones to show up with published investment theses)

Very few funds want a first year analyst. Most places won't take applicant without a minimum 2-3 years experience, unless its a fund that has an analyst program. Reason being is that these funds are very leanly staffed and don't have the resources to be super hands-on training someone. They want to hire someone who can hold their own when they join.

If you've done a year of IB, this is a great time to learn what you want to do and where you want to do it. Network in the space. Infra generally recruits on an as-needed basis so you shouldn't feel pressure to recruit [18] months in advance of a start date.

One of the best headhunters I've worked with a dedicated infra practice is OneSearch. However, most of my roles to date have been secured through my network, not headhunters.

In terms of "top funds," I think its a bit of an irrelevant question for infra. You can look up a league table. There are fund managers, pension funds, sovereign wealth funds, insurance companies etc directly investing infra. Spend time learning about the different business models here. The infra space can be quite fragmented, so just because someone has high AUM, doesn't make them " good" (someone can raise a large fund, putting them in the top of a league table, and perform horribly but it will take 5-10 years for them to get knocked off the league table based on AUM). Likewise, just because an infra fund has a prestige name, doesn't mean they are actually good infra investors (ex. Goldman Sachs infra funds have terrible returns)

Things to consider in your role (because for every option of these, there will be a prestigious investor in the space you can go work for): greenfield v. brownfield v. mix, equity check size ($1bn+, $500m-1bn, small cap), risk profile (core v. core plus v. value add v. opportunistic), geographic-focus vs. global mandate, sector focus or diversified

Once you have a better idea of what mix of things you're looking for, let's talk!

While I can't really speak to general PE underwriting as I've only done infra, I'm sure there are threads on WSO you can use to contrast to my answer.

1. Contracts-- how contracted are revenues / volumes / opex / capex and for how long?
2. Capex spend-- beyond any upfront proceeds, will this asset need any major maintenance or rehab, or expansion capex? Sometimes this can be contracted / mandated by the government
3. What's the growth look like? This is sense checking the expected growth of the asset vs. macro indicators. You want growth to a point, but if your asset is growing by 5% every year into perpetuity and the larger macro environment is growing at 1% into perpetuity, something is off
4. Downside protection in contracts / inflation protection / resiliency in macro environments-- all related to the points above
5. Debt-- how levered are you now? Terms/rates? Refi risk? Ability for a div recap? Most infra businesses tend to be fairly highly levered

I think it's easy to make a move up until a couple years into VP. There's overlap in the core skill sets. The only thing that could make it "niche" is if the team you're joining is a sector specialist. I personally prefer generalist programs for my own intellectual curiosity but also the analysis needed to be a toll roads expert is very different than PE businesses that can masquerade as infra like asset leasing / some telecom / energy / etc. It keeps my skills flexible. No one thinks poorly of anyone for wanting to try something different. And the "well thought through"-ness of Infra PE employees is not better or worse than any other sector; you've got people who are super into it and some people who are there to just pay the bills and have no issues switching.

That said, an MBA is a career reset button in my mind. If I decide I want to pivot away from infra, sure I'll try to recruit on my own and through my network and see how it goes, but I'm realistic an MBA is a very powerful tool to hit a hard stop. A lot of good / interesting jobs require an MBA anyways.

Exit opps out of MM vs. larger funds I think are all pretty good. They investment process across the firms will generally be the same and you'll learn the same skills. I think the difference is at a larger place, you can tend to have larger deal teams and your role on that deal will be more narrow and you'll be expected to go deeper. On the flipside, most MM shops tend to be smaller so you'll have 3-4 workstreams you'll need to lead but obviously may rely on advisors more as you don't have time to go as deep.

All I know right now about GIP's recruiting is that they are ALWAYS recruiting and they take people in with a wide variety of infra backgrounds. In terms of the process, I'll need to ask around. I've never interviewed with them as I wasn't interested in the more sweat shop-y culture they breed. That said, almost everyone there is super smart and I've heard from a partner there that there's carry down to the associate level, so I think that keeps people pretty motivated despite their longer hours.

Giving this a bit more thought, I'd also add that my experience with not getting through the resume filters for OCR was a similar hurdle in getting headhunters to put my resume through. But, that was mitigated over time with putting more deals on my resume. I think also specifically targeting infra-only roles helped, too, as it is more niche.

When I would get the interview but the GPA question came up, I point to my leadership positions in extracurriculars and note that I have a more well rounded, balanced profile. You can also mention a major-specific GPA, if you know it and its better than the overall.

BUT, overall, a mediocre GPA is a short term hurdle. Just kill it wherever you are currently and that will matter more soon enough.

In order to truly maximize your comp regardless of work/life balance, etc, I'd go to a fund that either 1. pays carry or 2. pays all cash comp with a short LTIP vesting cycle.  The trick with carry comp is are you getting paid from a general pool of carry comp or are you assigned a couple points of carry from a specific fund?  

IDK Brookfield's comp, but I know GIP pays carry to junior folks from a general pool.  MIRA pays carry to MDs and up only and it's fund specific.  So if you join MIRA today as an MD and are paid MIP V carry, you're not seeing a pay day for ~10 years.  MM and boutique funds are going to be more likely to do carry grants for junior/mid level folks.  

MFs aren't going to pay anyone carry under a certain level, similar to MIRA.  You may not even get access to the staff feeders either, where you can invest your own money in the funds.  Again, MMs and boutique funds will be better about this.  The fund I'm at now is a new entrant in infra and I'm getting carry.  I interviewed at a newer infra fund for an analyst role several years ago and I was also offered carry as part of my comp.  Antin offers carry at the junior/mid levels.  

Ontario-based pensions (and possibly federal CAN pensions too) offer above-market cash comp packages with short vesting (2-3 years) on the LTIP.  Ontario deregulated pension employee comp to help get better performance by getting better talent.  In contrast, similar to the US pensions, places like British Columbia or Alberta have regulated caps on pay and require public disclosure.  

If your experience is good, you can go up in AUM.  I have several colleagues who've done it.  I don't think a lot of people in infra think in these terms though.  Most people who are trying to go from a MM shop to a MF are doing it for some other end (i.e. to help get into a better B-school or to try to get into reg. PE).  Most people in infra aren't as hardcode brand whores as PE because of the things you discuss at the start of your post (i.e. not straightforward league tables).  A lot of the big name brands who do infra now (say BX or GS or MS) aren't considered to be doing good deals.  

I think the carry structure matters.  If you're paid carry out a general pool and depending on how they define your carry comp (i.e. if they're always describing it in % terms vs. capping you by a $ amt in some way), then yeah, AUM will be a great driver.  But I think most people pay carry based on a specific fund, so you'd want to be at a place that 1. pays carry 2. agrees to pay you a fixed % per fund (call it [.2%] per fund) and 3. has funds that are growing in size.  So getting carry at an EQT / Stonepeak / I Squared will be way more lucrative than say carry in MIRA, where MIRA doesn't increase their fund over fund size by much intentionally.  

Everyone is indeed stretching the definition of "infra" and some GPs (like EQT) always played in that gray area exclusively.  

If we look at the broader evolution of the infra market (let's say right after the GFC), we had P3s (arguably core infra) or utility take privates and the processes were dominated by funds earning a 10-15% return, which meets their returns mandate and is over the carry hurdle preferred LP return of 8%.  This market has a few new entrants of construction firms or passive insurance capital with a lower cost of capital, but they largely partner with the MIRAs of the world and compress returns for everyone slightly (say 9-12%).  Still not bad and it meets the carry hurdles. 

Then two things happen: 1. the P3 market starts to dry up / deals sizes shrink so the equity check is too small and 2. enter the pension funds-- CPPIB, Borealis/OMERS, Ontario Teachers, etc.  The pensions think of their infra allocation as heavily downside protected and they really only need it to earn slightly above the cost of their liabilities (6-7%).  So the pensions start buying up utilities and roads at an 8% vs. mira who can only afford [10%].  

Now MIRA needs to keep their return targets the same but can't do the types of investments they used to, so this where they start going after the gray areas.  

As for the LP pitch, I'm in the unique position of being on both sides of it as a secondary manager-- I have to pitch it to my LPs as well as it hearing it pitched to us from the GPs we are invested in.  The pitch has moved from "essential, hard assets in the ground" to a sort of definitional check list.  The typical GP checklist to qualify as infra is provide an essential service, contracted and or recurring cashflows / sticky customers, and government subsidy or regulation.  An investment doesn't need to meet all criteria. 

LPs aren't stupid though.  EQT recently said that about 50% of their infra LPs put the EQT infra fund in their PE allocation.  

I think fund size is less correlated to the returns and is more of a just a strategy call.  You can have core/core plus returns and value add/opprtunistic returns with companies of all sizes.  Many GPs are starting to create different infra funds to invest in different-sized companies (ex. Antin's mid market fund they just announced) but I don't think the overall return targets are changing much across the size-based strategies.  

Another thing we've seen people do is lower the preferred return hurdle to 6 or 7% to deal with compressed returns.  I think EQT's is 6% despite their strategy also being on the higher risk side but go figure

Curious to hear anyone else's thoughts on this topic too