Question about Infra PE (MF level if it matters)
Very confused about infra pe. At the umm / mf level infra pe level, are these funds:
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Taking infrastructure BUSINESSES (o&g, telcos whatever) private / doing LBOs -- basically traditional PE just sector focus is infra (o&g, telcos). So KKR / BX / Stonepeak whoever will take XYZ data center biz private, put debt on the business, own it, milk for fcf, exit. But these guys own the business. Essentially the exact same as normal PE just the sector is different
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OR is it just acquiring and operating infrastructure ASSETS? For example, XYZ energy co is selling some pipeline, KKR / BX / Stonepeak whoever will buy it, run it, milk for fcf for a while.
Is it 1 or 2. Or both? Do certain firms focus on 1 or another? Thanks
At least at BX / KKR, it’s mostly the former. Not super close to that side of the business but from what I’ve seen, it can be defined as standard private equity applied to asset-heavy businesses like telecommunications and logistics
Got it. That seems much more fun / interesting. Follow up Q -- so this style "classic LBO w/ focus on infra sectors (midstream, renewables, telco etc)" still involves a classic LBO model. Why is it that infra targets lower returns than regular PE if it's still effectively the same LBO model, just different businesses? Yes these are not as sexy, but they're still critical businesses. Digital infra / comms for example -- again, I don't know much about data centers so maybe that's the issue, but that seems like a critical infra asset / secularly growing business; shouldn't an infra sponsor be able to make 2.5-3x MOIC purely off mult expansion / margin expansion? These businesses generate tremendous fcf. Plus going back to LBO model, we're using debt to juice returns. Why do these end up being like 1.25-1.5x MOIC deals?
Is this not the right way to think about it?
1. Let's make sure we're using the right numbers - BX infra, for example, targets 12% IRR over 7-10 years. That's a 2.2-3.1x MOIC.
2. The businesses are lower risk, hence opportunity cost of capital is lower, hence sponsors can bid higher in auctions, hence underwritten returns are lower. If BX were to bid to a 20% IRR they'd just lose the auction to Brookfield who can bid 15%.
3. Tough to underwrite multiple expansion when you're already paying up to 30x (in the case of towers) for assets
4. Tough to underwrite margin expansion because there's not a lot of economies of scale given asset-heavy nature of the businesses. To your original point, infra platforms are essentially accumulations of individual assets, with a small % of corporate overhead. Adding 10 new data centers to your 100 existing ones is cash flow accretive, but typically not margin accretive.
reccomend you search through prior infrastruture PE mega threads on wso which will answer your queries. infra PE can/will do 1, 2 or both however the neuance is in the asset risk profile they target
core infra: typically mature perptual or de-risked finite life assets with low risk cash flows due to e.g., high quality contracts or objective monopoly position = IRR e.g., 6-10%
core+ infra: typically some combination of core and core++ factors
core++ infra: typically less mature assets, less asset backing, less cash flow visibility, cross over into e.g., RE, industrials, logistics or transport, perhaps new technology/sector which infra investors arn't familiar with = IRR closer to typical generalist PE
would you take BX/KKR Infra over EVR M&A if my long term goal is classic buyout?
I chose the former
Happy with your choice? Could you dm me for a quick question?
Couple of questions:
BX/KKR Infra, at their return targets they are basically looking at industrials/logistics/energy/transport/telco cross-overs anyway
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