Overview of Infrastructure Private Equity

Hello WSO, I have been a long time lurker, and this is my first post (or maybe I am one of the top rated authors who decided to make a post anonymously). I have noticed a certain lack of information about infrastructure investing on WSO, and those threads that are created from time to time, are long on questions and short on answers, especially on answers from actual industry insiders.
With this in mind, I have decided to make this post and cover the following topics:

  • What infrastructure PE is and how it is different from traditional PE
  • General info about infra PE landscape
  • Key players in infra PE space
  • Details about day-to-day job in infra PE

If any of the areas after my post remain unclear, I am more than happy to answer questions in comments. As for my background, I am based in London, and I am senior associate at one of the best infrastructure PE firms.

Here we go.

What is Infrastructure Private Equity?

When I say investing in infrastructure, I mean investing in such assets as

  • Utilities: gas / electricity / water distribution, communications infrastructure
  • Transportation: airports, seaports, roads, bridges, rail
  • Social infrastructure: hospitals, education facilities, etc.
  • Energy related: power plants, oil and gas pipelines, oil terminals, renewable energy assets and such (read on for the discussion about where energy ends and infrastructure begins)

You might want to know why investment community treats infra PE as a distinct bucket and not just as part of "traditional" PE. It is a fair question and there are many reasons for that. Specifically, from investors' (i.e. limited partners') perspective, infrastructure more often than not possesses the following distinct characteristics:

  • Low volatility, protected downside, stable cash flow profile - all this stuff basically meaning "low risk" (comparing to traditional PE). We will talk a bit about returns later but I have seen plenty of deals where even in most disastrous downside case the investment would return some 3-5% IRR. How cool is that? Investors value protected downside a lot.
  • Strong cash yield. Although this is not an absolute necessity, vast majority of infrastructure assets being purchased by financial investors have some current dividend yield and investors love that. It is quite different from PE (where all your return usually comes on the last day from exit, maybe boosted by one-off dividend recap in the middle) and in this respect it resembles REPE where current yield is more often a requirement than not.
  • Infrastructure assets performance is often implicitly or explicitly linked to macro indicators such as inflation, GDP, population growth etc. Therefore many investors naturally see infrastructure as a hedge. For example, if inflation increases or population in a country grows, public pension plan would see the pension payments to people increasing. At the same time, if this pension plan is invested in CPI-linked infrastructure (e.g. regulated gas distribution utility) or population-linked infrastructure (e.g. toll road), you can see how it helps to offset the increasing pension liabilities.
  • Defensive resilient performance profile and low correlation with other asset classes (such as PE, equities, fixed income, RE, etc.). No need to explain - private infrastructure provides good diversification benefits to investors' portfolios.

infrastructure investment returns and classifications

Infrastructure always consists of physical assets so, unsurprisingly, in many instances it resembles real estate and hence there are many similarities between infra PE and REPE (and both can be brownfield i.e. buying operating business, or greenfield aka development - constructing stuff from scratch). Since I am mentioning real estate here, it is worth noting that infrastructure uses very similar classification of infrastructure assets by risk buckets. Some would hate this classification but it is widely used in the industry and is actually very helpful.

  • Core infra: boring operating assets with most/all of the return coming from cash dividends; most likely state-regulated revenue with limited risk on revenue side. All you need to do is not to mess up operating costs. No or very limited growth. Example would be some regulated electricity distribution in the US or Western Europe. As it stands today, you would expect equity IRRs of below 10% for such investments but on the other hand it is still several times above fixed income instruments and risk is much lower than traditional PE. Downside scenario when everything goes perfectly wrong can still yield 3-5% equity IRR. Also, public private partnerships (PPP) are often considered "core" even when they assume greenfield construction - because under PPP model the risks on revenue side are usually very low, theoretically absent, so you just need to manage your costs to get the desired return.
  • Core-plus infra: somewhat more risky, will include operating asset with some growth story or growth / expansion capex, or vanilla operating infra asset in questionable jurisdiction (for example, regulated water utility in Poland). In developed market (North America, Australia, Western Europe, Japan) typical equity IRRs would be in low teens, while in emerging markets such as Asia there can easily be premium of 5% or sometimes even more.
  • Value add infra: investment in infrastructure requiring some serious operational involvement, potentially substantial business re-profiling. For example, buying regional airport with aim to turn it into super-regional hub, or buying bulk liquid seaport and building container-handling facility (never seen these exact situations in practice but I am trying to come up with something clear for non-infra professional).
  • Opportunistic infra: riskiest of all, with limited or no dividend yield, with bigger downside risks. Here we are talking about some 15% equity IRR and higher, depending on jurisdiction. This category is quite small and there is a reason for that - here it becomes too close to the border of traditional PE and limited partners would be inclined to invest into PE at these returns because PE firms are bigger specialists in this high-risk-high-return territory. No firm can invest in infrastructure and consistently earn some 20% IRR for years. If someone tells you that, most likely they are either lying, or they are investing in something that is not infrastructure.

Those of you who work in REPE will definitely recognise this terminology of core, core plus etc.

One infra PE firm can have several active funds in various categories, e.g. one core/PPP fund and another broader core-plus/value-add fund. But there are plenty of fund managers that focus almost exclusively on core infrastructure. I am talking about such names as Amber Infrastructure (with their INPP franchise), John Laing, DIF, InfraRed Capital Partners (and their listed HICL fund), Innisfree and few others, sorry for forgetting.
You normally wouldn't have fund that invests both in core and value add / opportunistic, simply because returns are very different (IRR can be 2x different between core and opportunistic investments).

History of infrastructure private equity funds

Unlike traditional PE or REPE, infra PE is a relatively young game. Some 20 years ago it was almost unheard of, globally, to attract private financial capital for large infrastructure assets. Most infra assets belonged to governments or to corporates who once built them. Infrastructure private equity didn't exist. However, some time ago which I feel was around early 2000s, few countries such as Australia and Canada pioneered attraction of private (financial) capital for both construction of new infrastructure and monetisation of existing assets. Australian bank Macquarie is widely credited as the first-mover who actually started raising PE funds with the mandate to invest exclusively in infrastructure.

Currently infrastructure is a crowded space with a lot of fund managers competing for deals in all regions globally. And infrastructure isn't created out of thin air (unlike IT start-ups, for example) hence supply of good deals is growing much slower than demand. And believe me, demand is there, because limited partners throughout the world finally appreciate benefits of investing in infrastructure (meaningful return with protected downside and low correlation to other assets - very good combination).

Speaking about the US market, historically US institutions (such as public pension plans) were comfortable with traditional PE and energy-focused PE. Infrastructure asset class was somewhat overlooked in the United States. While Western Europe, Canada and Australia loved infra for its risk-return profile, the US apparently was finding infra to be a bit too boring. In recent years US has been catching up actively but still it is clear that perception or risk in the US is a bit different. What would be considered value add infra in Europe, would be routinely treated as "core"/"core-plus" in the US. Also US pension plans are in love with energy-related infrastructure so in recent years some asset types that were historically considered "traditional PE" for years (merchant power plants, merchant oil and gas pipelines, even refineries) are now being pushed into infrastructure territory (with IRRs falling correspondingly). To give you an idea, infra PE fund in the US can buy into a construction of a merchant (i.e. no government subsidies or guarantees) gas power plant or even wind park. In Europe, infra funds would only consider it if it is already operating and has some sort of subsidy (capacity payments or else). There are of course exceptions here and there but this should give you a general idea of Europe vs US dynamics. Generally, in the US the borderline between energy-focused PE and infra PE is sometimes blurred. Watch out for such names as ArcLight Capital Partners, Energy Capital Partners - these are on the border between infra PE and energy PE.

Australia is a bit like Europe (or rather Europe is a bit like Australia) - conservative view on risk with sometime unbelievably high valuations (think 25x EBITDA multiple for a seaport or an airport) and fairly low IRRs.

Asia (ex Japan) is still an emerging market and infrastructure IRRs are not very far from traditional PE.

South America is a frontier market with limited number of deals happening (although this seems to be changing recently as competition for assets in developed world has driven valuations to insanely high levels).

Africa is a no at the moment.

Within infrastructure, financial investors can be broadly divided into two groups: fund managers and institutional investors (latter being pension plans, insurance companies and sovereign wealth funds). Until recently the infra PE landscape was dominated by fund managers, with institutional investors supplying passive money to them. However, the trend in recent years is big institutional investors going direct - that is, building their own direct investment teams that would compete for deals with fund managers. Some (especially Canadian pension plans) are ahead of the curve and strong and experienced enough to do deals on their own. Given high quality of people and cost of capital being lower than traditional infra PE fund, they are seen as a very serious contender.

Who makes private infrastructure investments?

As I mentioned just couple paragraphs above, the universe of financial players that invest in infrastructure, can be broadly divided into fund management firms (either dedicated asset managers or fund management arms of big diversified banking groups) and institutional investors (pension plans, sovereign wealth funds and insurance companies). Below I provide overview of each of those categories.

Independent asset managers
These can be:

  • Pure play infrastructure fund managers (e.g. Global Infrastructure Partners who are on track to close their monstrous GIPIII fund at well above $11 billion; also keep eye on such names as Alinda Capital, Highstar Capital, AMP Capital, IFM Investors - all managing billions of infrastructure equity)
  • Fund managers focused on broader real assets (Brookfield being the most notable firm focused on real estate, infrastructure and timber - their latest dedicated infra fund BIFIII is record-breaking $14 billion - largest infra PE fund in history)
  • Diversified asset managers (KKR Global Infrastructure Fund II closed at $3.1 billion last year, EQT Infrastructure is targeting $3+ billion for fund III, etc.). Blackstone used to have infrastructure PE business but then the team spun off to create an independent firm called Stonepeak Infrastructure (Stonepeak closed their second fund at $3.5 billion earlier this year). Carlyle raised $1 billion infrastructure fund in 2007, probably investments didn't go well - they never followed up with fund II. Apollo, TPG, other bulge bracket PE firms - haven't heard about dedicated infra platform inside these.

Large banks
Many of the biggest banks that have merchant banking or private equity business, would have infrastructure PE franchise. For example:

  • Goldman Sachs (named West Street Infrastructure Partners, third vintage at $3 billion). I understand that for regulatory purposes US banks have to come up with different names for their private fund management business hence Goldman becomes West Street etc.
  • Morgan Stanley (named North Haven Infrastructure Partners, second vintage at $3.5 billion)
  • JPMorgan Asset Management - these guys are investing primarily through their open-ended JPMorgan Infrastructure Investments Fund and separately-managed accounts. It is hard to estimate the amount of infra capital they manage.
  • Deutsche Asset and Wealth Management (on track to close their second vintage of Pan-European Infrastructure Fund II at $2+ billion)
  • Macquarie Infrastructure and Real Assets - infra PE business of Australian Macquarie Bank. With some $100 billion of infra assets under management, they are probably the largest infra PE firm out there. Unlike many other investors mentioned in this topic, these guys prefer to raise regional funds that tend to be smaller in size (e.g. Korea focused fund, Mexico focused fund) but aggregate amount they raise is outstanding. Their flagship funds are quite big though, e.g. Europe-focused MEIF5 closed earlier this year at $4+ billion hard cap.
  • Citi and UBS have some infra funds but not very big, as far as I know.
  • I can't recall BAML or Barclays doing anything in the space.

Pension funds
Canadian pension funds (CPPIB and OTPP being the strongest, also Borealis and several others) are known for being well mature in a sense that they don't need fund managers anymore - for infrastructure they almost entirely replaced their fund investment program with direct investment program. They have strong teams and fairly low return requirement (to some extent because they invest their "own" money so there is no management fee or performance fee layer) which makes them very strong competitors to fund managers. Many high profile assets were won by the Canadians in last few years. They would normally focus on bigger deals, because they have a lot of money to invest and teams are generally small, so they can't afford chasing some $500 million EV deals.

In Europe Dutch pension managers (APG and PGGM) are reasonably mature to do deals on its own, also USS in the UK, also they invest in funds as well.

In Australia many superannuation funds are capable of investing directly on their own in Australian infrastructure, but outside their home turf they are usually quite helpless and would only invest directly alongside a more experienced fund manager.

Sovereign Wealth Funds
Similar story to pension funds - historically SWFs have been limited partners but now are actively building direct investment teams, poaching bankers from BBs and other infra PE firms. However, the industry needs few more years to understand how it plays out.
These days most active are SWFs from Middle East (ADIA, ADIC, Mubadala, QIA, KIA through their infra investment arm called Wren House), China (CIC), Singapore (GIC). They also have fairly low return requirements, same as many pension plans, but they also have more capital, virtually unlimited given that government can print money (simplifying here, but only to a degree).

Investment arms of insurance companies
For relatively low risk, resilient performance and link to macro indicators, insurance companies also have come to like infrastructure quite a lot. Some invest purely its own balance sheet money (e.g. Allianz), some set up fully fledged fund management platforms and manage both money of the insurance parent and of third parties (e.g. Swiss Life). Nevertheless it is still quite rare for insurance companies to invest directly and most remain passive limited partners / investors in third party funds.

On the Job

Day-to-day work and deal making is very similar to traditional PE with majority of deals being fairly classic LBOs.
In terms of deal sourcing, it is a typical combination of proprietary sourcing and competitive auctions (which become increasingly common, at least in developed markets). Privatisations are still common but so are secondary deals (financial investor selling to financial investor) and buying non-core assets from corporates (for example oil giant Total selling pipeline system in North Sea to an infra PE fund).
With that being said, public-private partnerships (PPP) is a world of its own within infrastructure. This is when, for example, private sponsor constructs a toll road with government guaranteeing $X million revenue per annum or, even better, guaranteeing Y% return on construction costs. This is just one example, PPPs can take a lot of various forms, but common theme is private capital + certain guarantees and support from the government. In today's infrastructure PE world PPPs are not very big part - note that PPPs do not always require financial investors, often a construction company would finance PPP with their own balance sheet (e.g. Vinci).
Investment banks are active advising buyers and sellers in infrastructure. Some banks use energy and natural resources teams to advise on infra deals, some use industrials teams, some are advanced enough to have dedicated infrastructure M&A advisory groups (e.g. JPMorgan and Macquarie Capital).

Working in infra PE
As an investment analyst or associate at an infra fund you will do the same stuff as you would do in any PE firm: modelling and deal execution, portfolio management and exits, market research and reportage to limited partners. Some associates are also involved in launching new funds and fundraising.
Investment process is also typical. You would normally expect seller to release Info Memo and some initial materials and then require first round indicative bid for an asset within 3-5 weeks, and then second round (assuming you made it through the first round) binding bid 4-6 weeks after. A buy side team will hire a small army of advisors, will have several meetings with their Investment Committee including final price-setting meeting couple days before the binding bid. When deal is negotiated privately, more variations are possible but the pattern would often be similar.

If you have read it by here, you should have realised that protecting downside is very important when structuring and executing an investment in infrastructure. I think this is largely a reason why modelling is often insanely detailed here. You would have a model horizon of at least a decade (often longer, for core assets till the end of concession which can be 50+ years). As if it wasn't enough, having quarterly model isn't uncommon. Read it again: models are insanely detailed. Revenue, opex and capex are modelled in great detailed and is broken down into line items, and almost on each item, even the smallest one, you need to take a view backed up by thorough due diligence, research or legislation. Simple "let's grow this line at 5% per annum" is not acceptable. Even if revenue is based on the government-determined tariff (sounds simple, eh?), the official formula for tariff calculation is often ridiculously complicated, depends on opex, capex, macro assumptions and takes hundreds or or thousands of rows in Excel to calculate. Sometimes I think that going that complex increases the probability of a mechanical error in Excel and also probability of making a wrong assumption as well. Unfortunately simplistic approach about growing something at random 5% can sometimes be more accurate than super-duper detailed bottom up modelling with wrong assumptions (infamous GIGO effect).

With that being said, the above information about modelling and investment process is only true for fund managers and some of the top pension plans. There are other participants in the market - less sophisticated, sort of, and they will rely on more simplified assumptions and valuation techniques or would just trust their M&A advisor on modelling and valuation completely. Read on for more details.

Fundraising
To give you sense of the scale of infra PE space, see some approximate figures on fundraising:

  • By infra PE funds: $50+ billion per annum
  • By real estate PE funds: $100+ billion per annum
  • By traditional PE funds: $200+ billion per annum

It is somewhat unsurprising that infra is lower as there are much less airports than shopping malls than cloths retailers! $50 billion every year is still quite huge though. Add another $100 billion of debt that can be raised against this equity (infra assets are usually very leverage-friendly thanks to stable cash flow profile) and you have some $150 billion of new financial capital chasing infra deals every year.

Deals
Here are few examples of infrastructure deals in last year or two:

  • IFM Investors buying Indiana Toll Road (US) for nearly $6 billion
  • CPPIB and Hermes GPE buying Associated British Ports (UK) for $2+ billion
  • OTPP and Borealis buying London City Airport (UK) for $2+ billion
  • Global Infrastructure Partners buying 20% of Gas Natural SDG (Spain) for $4+ billion
  • Brookfield, CIC and GIC buying 90% in Nova Transportadora do Sudeste (Brazil) for $5+ billion
  • Macquarie MIRA buying Cleco Corp. (US) for $4.5+ billion

Just because of the nature of the asset, small and mid-cap infrastructure doesn't really exist. Although at my firm we have a very flexible mandate, I rarely see opportunities at below $200 million equity (which usually means $400+ million EV). Anything below is often a joke - subpar asset that requires a lot of work that will not adequately reward the fund manager.

Fund manager economics
Comparing to traditional PE, you would expect slightly lower management fee (mostly 1%-1.5%; it is very rare to see 2%), and 20/8 carry structure. However, there are two things that need to be noted. First of all, holding periods for infrastructure assets are much longer than in traditional PE. No one buys a toll road or water utility to flip it on in two years. Typical investment horizon is 5-10 years and becoming longer, with some funds in the market having life of 12 years and more. Therefore one infra fund will generate management fees for a longer period of time than a PE fund of the same size would. Downside of it, of course, is that you will wait longer to get your carry. In absolute size, carry is probably somewhat comparable to a decently performing PE firm (lower IRR + longer holding period = approximately same money multiple and therefore approximately same carry)

Conclusion

Here I seem to be running out of things to tell you about. But it is also possible that I forgot something very important. Please ask in comments.

Mod Note (Andy): Best of 2016, this post ranks #6 for the past year

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Comments (84)

Nov 25, 2016

Wow. Fantastic stuff. Having been in Infra PE this sums the industry better than anything I've seen. The part where you mentioned detailed models made me laugh at how many times my Excel crashed from running those things, and seeing you mention one of the deals I was on brought back many happy (and less than happy) memories. +SB

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Nov 25, 2016

Couple questions.

  1. Thoughts on the value-add of a PE firm in a greenfield transaction when equity cheques are already small as transactions are already extremely levered? It seems more and more Vinci's, Accionas, ACS's are taking a larger chunk of the equity themselves so why include the PE firms when they don't understand how to efficiently construct or operate an infra asset.
  2. Thoughts on the infrastruture banks that Canada is pursuing or that a Trump administration might consider?
  3. Next big place is Chile?
Nov 26, 2016
SA-123456:

Couple questions.

  1. Thoughts on the value-add of a PE firm in a greenfield transaction when equity cheques are already small as transactions are already extremely levered? It seems more and more Vinci's, Accionas, ACS's are taking a larger chunk of the equity themselves so why include the PE firms when they don't understand how to efficiently construct or operate an infra asset.
  2. Thoughts on the infrastruture banks that Canada is pursuing or that a Trump administration might consider?
  3. Next big place is Chile?

Hi and thanks for questions.

  1. This is surely a valid question. Although brownfield, for examples I would refer to privatisation of two airports in France earlier this year. Lyon airport was acquired by consortium of Vinci (construction company and operator ) and Caisse Des Depots and Credit Agricol (both financial investors). Nice airport was acquired by Atlantia, Aeroporti di Roma and EDF Invest (all are construction/operation corporates). I agree when Vinci-type corporate has enough interest and money to acquire an asset, they don't have big motivation to take financial sponsor along. With that being send, keep in mind:
    Vinci (since we are using it as the example, but that is valid for most big corporates) is a listed company. They care about earnings per share, not cash flow or cash multiple. As long as they own more than 51% of the asset, they can consolidate 100% of asset's earnings into group earnings, and they still control it. 49% is really a dead weight so why spend cash on it. Let financial sponsor grab it.
    Also, financial sponsors are better with raising debt for the acquisition and assets and structuring acquisitions (i.e. all the financial engineering) - this is something fairly important and many corporates are phenomenally bad at it. This is another reason why corporate would want to partner with PE.
  2. I imagine such infrastructure bank would provide low interest rate debt financing for PPP-type infrastructure projects. What it means for infra PE funds? I think not much. Lower cost of debt would probably be offset by lower leverage (such government-sponsored loans often come with prudent aka strict covenants and limits), and ultimately the benefit is accessibility of debt for the projects rather than anything else.
  3. I don't have strong opinion about Chile.
    • 1
Nov 25, 2016

Great post! SBed.
Few questions:
1. How is compensation for infra PE compared to traditional PE?
2. Aren't firms like ArcLight and Energy Capital Partners more likely to generate higher IRRs because they delve into energy as well as infra investments? If so, why don't most infra-focused firms try and pivot to cover the whole "real assets" spectrum?
3. Can you talk about the growing space of urban investing? Like the work the Urban Investment Group at GS does?
Thanks!

Nov 25, 2016
myr899:

Great post! SBed.Few questions:1. How is compensation for infra PE compared to traditional PE?2. Aren't firms like ArcLight and Energy Capital Partners more likely to generate higher IRRs because they delve into energy as well as infra investments? If so, why don't most infra-focused firms try and pivot to cover the whole "real assets" spectrum?3. Can you talk about the growing space of urban investing? Like the work the Urban Investment Group at GS does?Thanks!

Thank you.

  1. Top traditional PE firms will compensate better than top infra PE firms. At analyst/associate level the difference isn't big especially if you are top performer in your class, but from above associate level I think base+bonus in infra PE space starts comparing unfavourably vs traditional PE. That is where carry question comes into play and in infra space you are unlikely to get any carry if you work in a bank or institutional investor (you will get some long-term incentive or in case of a bank deferred shares but that wouldn't be really the same as having stake in carry/GP).
    Note that pensions funds and SWFs who today are eager to build a direct investment platforms are ready to pay really good base+bonus (on par with top traditional PE or, by some feedback I get, above) but I don't know how sustainable that is.
  2. Arclight and ECP would deliver higher IRRs than typical infra, sure, but with higher risk (Arclight's last few funds range from 10 to 20% net IRR, ECP range from negative in 2006 fund to some 15-20% in 2009 fund, this info is a bit outdated though), exactly because they are investing in something that is often not infra. This is an interesting point and I see some PE firms (not telling you names) abuse the system by marketing something more opportunistic as infra. That allows them to raise capital and promise lower return to their LPs, and then armed with such capital they go and win deals because they compete for risky assets with PE funds that shoot for 20%+. "PE risk with infra return". Very bad for investors. Not saying ArcLight and ECP belong to that category, these guys are genuinely higher on risk-return curve than infra PE. Touching on the second part of your question, limited partners are generally (1) not stupid, and (2) want diversification. So if you raise infra fund and start investing in upstream energy, you will be in trouble because (a) investors will see that it is not risk-return profile that they expected from you, and (b) if they want to invest in energy, they would just give money to energy PE fund. They want to control diversification and capital allocation themselves, and they want their fund manager to specialise in something narrow and be good at it.
  3. I don't know much about it so can't offer my opinion but from the description looks like it is some sort of non-profit, or at least business where IRR isn't the only KPI (but also social impact etc.). I haven't reached this degree of enlightenment just yet.
    • 1
Nov 25, 2016

SBed for a great article, I work in PE but don't know much about infrastructure PE so interesting to read up on another type of asset. Couple of questions out of curiosity:

  • If carry is rare and comp starts to become less competitive over time, what is your long term play for infra PE? Join a bigger fund? Is the lifestyle/hours any better than traditional PE?
  • How does in person diligence work on these infra assets? Do you just hire advisors and get them to help out? Do you ever find yourself traveling to random countries to help out with diligence on something like a gas pipeline, water processing plant, power plant, etc?
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    • 1
Best Response
Nov 26, 2016
mrharveyspecter:

SBed for a great article, I work in PE but don't know much about infrastructure PE so interesting to read up on another type of asset. Couple of questions out of curiosity:

  • If carry is rare and comp starts to become less competitive over time, what is your long term play for infra PE? Join a bigger fund? Is the lifestyle/hours any better than traditional PE?
  • How does in person diligence work on these infra assets? Do you just hire advisors and get them to help out? Do you ever find yourself traveling to random countries to help out with diligence on something like a gas pipeline, water processing plant, power plant, etc?

Thank you.

  1. Only independent asset managers offer its employees share in GP / carry (it is situation not only in infra, in other PE too). Banks can't do that because all profit belongs to a corporate parent. Pension plans, SWFs, insurance cos can't offer carry because they don't have one. Instead, all these guys come with other ways to offer employees long term upsides in some shape or form (e.g. bank give shares). In terms of long term play - sticking with infra for now, let's see how it goes down the road. Regarding hours - I don't know about other firms. Last 2-3 weeks before the deal signing / bid submission, hours are very brutal. Otherwise more than acceptable.
  2. Army of advisors will be hired, sure, including technical advisor and sometimes also separate environmental advisor. Also we have quite a few operating experts who came from the industry so they give a good steering as to what important to watch out for and what is not. Site visit is a must, even if in another country, but depending on an asset it can be very useful or waste of time. If the asset is a port, visiting it gives a good idea re how efficient it is operating, how well maintained infrastructure is etc. But if you are buying 5,000 km of gas pipeline network, site visit will probably consist of visiting a control room and you having a look at a section of pipe that is laid under the ground somewhere (few dozens of meters). From technical point of view, such site visit is rarely useful but it gives access to management in a semi-informal environment and that is valuable anyway. Because in a context of a competitive auction access to target's management is very limited and strictly controlled by sell-side M&A bank.
    • 4
Jun 3, 2017

If you're doing it at a pension fund you just won't be making the money the guys at like an Apollo or a Blackstone would be in NYC. On the other hand during my entire summer internship I haven't seen anyone some into the office on a weekend and by 6/6:30 the office is quiet. I think most of the guys are in the low six figures range including bonus but the lifestyle is great.

Nov 25, 2016

Very good write up. That said I have participated in a few short term (1-2 year) flips so they do exist however like you said not very common

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Nov 26, 2016

Hi, thanks for this.

I am wondering, what are the most common entry routes into Infrastructure PE? Are there any banks/groups (in London) that are more favorable when it comes to recruitment?

Nov 26, 2016
jadsadadada:

Hi, thanks for this.

I am wondering, what are the most common entry routes into Infrastructure PE? Are there any banks/groups (in London) that are more favorable when it comes to recruitment?

PE recruiting in London is generally less structured than in the US, and infra PE is even less structured than common PE. Some infra PE funds hire graduates for analyst positions (with good opportunity to grow within the firm without MBA). Here couple finance/IB/PE internships would be helpful. Some infra PE firms would hire young bankers after 1-3 years in IB. Most relevant groups would be infrastructure, energy, natural resources, maybe industrials. Real estate a bit less so.

    • 1
Nov 26, 2016

How about Project Finance or Leveraged Finance? Are these groups favorable when it comes to Infrastructure PE recruiting?

Nov 27, 2016
mp4444:

How about Project Finance or Leveraged Finance? Are these groups favorable when it comes to Infrastructure PE recruiting?

I think for junior positions (graduate/analyst-level) this will be very relevant (e.g. if you spend summer on had long-term intnernship in infrastructure project finance) and I personally would prefer analyst who had experience in infra project finance or infra leverage finance rather than top notch M&A group that is unrelated to infrastructure, all else equal. But in all honesty, your professional experience (infra or not) for junior positions isn't that important, your performance during interviews is much more important.

For experienced hires, I think the situation is different because in project finance or LevFin you wouldn't get necessary modelling experience therefore lateraling would be hard - but not impossible and this is where demonstrable and relevant experience in INFRA project finance (not just any project finance) is crucial.

    • 1
Nov 26, 2016

Incredibly cool. +1 SB

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Nov 26, 2016

Just a quick addon, I believe BAML is relatively active in the renewable energy project finance industry, similar to something like GE EFS.

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Nov 26, 2016

Have been doing more work in this industry around the edges in recent years and shocked at how low the hurdle rates are for so many players. I've heard a lot of it is coming from Chinese investors looking for inflation hedges and USD exposure, so are willing to take more risk than normal for insufficient IRRs. Can you talk more about how you see that playing out? E.g. Newbuild merchant gas plants for high single digit IRRs.

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Nov 26, 2016
BeastMode:

Have been doing more work in this industry around the edges in recent years and shocked at how low the hurdle rates are for so many players. I've heard a lot of it is coming from Chinese investors looking for inflation hedges and USD exposure, so are willing to take more risk than normal for insufficient IRRs. Can you talk more about how you see that playing out? E.g. Newbuild merchant gas plants for high single digit IRRs.

It is nuts, isn't it? I think it is a supply-demand issue. Demand for infra grows much faster than supply of quality assets, driving valuations up and returns down in a broad infrastructure space. With that being said, I understand when regulated asset is bought at single digit IRR - it is still 3-4x higher than corporate fixed income instruments would return, will have similar profile (i.e. strong current cash yield) but offset with some operating risk. But buying merchant assets at single digits is beyond my understanding - but this is a new reality to which PE fund managers need to adapt. By adapting I mean (1) accepting that for money invested today performance fee aka carry will be lower in years to come, and (b) exploring emerging markets opportunities.

    • 1
Nov 26, 2016

I have a personal question regarding the infra PE industry. do you mind if I pm you?

Nov 26, 2016
kyc133enydc:

I have a personal question regarding the infra PE industry. do you mind if I pm you?

Sure, feel free to pm me

Nov 26, 2016

This is really interesting. I have a few questions:

  1. You're in the UK, so you probably won't have to worry about this. But when the time comes to build the Ameri-Mexi Wall, do you think Infra PE will fund parts of this?
  2. How do you get into this space in terms of highly recruited places for analyst/associate spots to the type of skills and experience that firms in this space typically look for?
  3. How do you maintain a stable portfolio (I guess in a general PE sense of the term), especially given that these assets are probably much more fragmented and have more structured sales (auctions)? Are there just a lot less firms?
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Nov 27, 2016
iBankedUp:

This is really interesting. I have a few questions:

  1. You're in the UK, so you probably won't have to worry about this. But when the time comes to build the Ameri-Mexi Wall, do you think Infra PE will fund parts of this?
  2. How do you get into this space in terms of highly recruited places for analyst/associate spots to the type of skills and experience that firms in this space typically look for?
  3. How do you maintain a stable portfolio (I guess in a general PE sense of the term), especially given that these assets are probably much more fragmented and have more structured sales (auctions)? Are there just a lot less firms?

Thanks.
1. This was one of the most popular jokes on the floor when Trump won. I am sure the no infra PE firm would participate in this project for reputation reasons. I trust that Trump also won't do this for the same reasons.
2. I have spoken a bit about it above and below. Long story short: at graduate/analyst level previous experience doesn't matter much (of course you are expected to have one or few internships in IB/PE but it is not essential that they are in infra space), your performance at interview matters much more. For experienced analyst and above, experience in infrastructure or adjacent sectors (such as energy) becomes almost a must. Skills: all the same as for any high finance, i.e. knowing modelling, corporate finance, accounting, how deal is done, how infra is different from other sectors.
3. Not sure what you mean by stable portfolio? Happy to answer but if you re-formulate the question or give me an example.

    • 2
Nov 27, 2016
:

How do you maintain a stable portfolio (I guess in a general PE sense of the term), especially given that these assets are probably much more fragmented and have more structured sales (auctions)? Are there just a lot less firms?

By this I'm referring to risk tolerance. Is it easier or harder to exit or add deals to your platform, given the nature of infra deals, relative to other industry deals (say a retail chain that wants to sell a couple assets, which might happen more frequently)? I'm wondering how do you deal with deals that might not go through and whether you've ever been faced with deals falling through and if or whether that affects strategy.

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Nov 27, 2016
iBankedUp:

:How do you maintain a stable portfolio (I guess in a general PE sense of the term), especially given that these assets are probably much more fragmented and have more structured sales (auctions)? Are there just a lot less firms?

By this I'm referring to risk tolerance. Is it easier or harder to exit or add deals to your platform, given the nature of infra deals, relative to other industry deals (say a retail chain that wants to sell a couple assets, which might happen more frequently)? I'm wondering how do you deal with deals that might not go through and whether you've ever been faced with deals falling through and if or whether that affects strategy.

For each fund that infra PE firm raises, there will be 4 (sometimes 5) years of "Investment period", i.e. during this period the fund must be fully spent, per Limited Partnership agreement. Also, LPA will include concentration limits for this specific fund - no more than [30]% in specific industry (utilities, telecom, power, transport, social), no more than [30]% in a specific region (e.g. 30% max invested in Europe for global fund, or 30% max invested in the UK for European fund).

You are right that sometimes it is hard to maintain this. Although dealflow in 4-5 years period is normally enough to create a balanced portfolio (i.e. you will see plenty of deals in all sectors and regions/countries), with most sales being auctions you don't "control" what you can and cannot buy.

I see how sometimes you would be willing to accept lower return (i.e. pay higher price) for the asset if it is in the sector you don't have in the fund.

    • 1
Nov 27, 2016

I really appreciate your answers.

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Nov 26, 2016

Thank you for this very useful post. Would you mind sharing your path to infra PE and any advice for maximizing odds?

Nov 27, 2016
Intrepid:

Thank you for this very useful post. Would you mind sharing your path to infra PE and any advice for maximizing odds?

Thank you. I spent 1.5 years in boutique which was focused on sectors adjacent to infrastructure before joining my current firm as an experienced analyst. Maximizing odds? Well, let me tell you few typical paths that I often witness in infra PE. Given they are popular, they would maximize your odds.
1. Join infra PE as a graduate (or even as summer analys and get FT offer)
2. Join M&A team in a good bank with focused on energy, infrastructure, natural resources or (a bit less recommended) industrials or real estate, then at some point in time move to infra PE (can be done at associate, VP or MD level, at least in Europe)
3. Join industry, become a reasonably senior executive in certain sector (e.g. UK gas) and join infra PE as a director-level professional

Your choice!

Nov 27, 2016

Solid post. Especially regarding the infrastructure / energy PE distinction. It can get very blurry. Traditionally upstream-focused megafunds (Encap, Riverstone, Denham, etc.) have expanded their investment strategies to encompass all verticals (upstream, midstream, downstream) of the energy industry. Most often, these firms raise separate funds to do so due to the reasons that you mention (primarily the drastic difference in the risk / return profile).

Nov 27, 2016

I usually don't partake in the "great post" circle jerk, but this was really good and interesting.

"We listen, if it feels good we shake."
"This town is nuts, my kind of place."
-WSMFP

Nov 27, 2016

Thanks for this post - super helpful. A decent number of questions for you:

Do individuals ever specialize in a certain sector (e.g. toll-roads, O&G, renewables) or is every expected to look at everything?

Is utility knowledge useful? Knowledge of utility design, wholesale vs. distribution markets etc. or is that less relevant?

Have you seen any interest toward distributed infra assets? Not so much large scale wind farms but maybe a large portfolio of residential solar assets?

Also... very random question, but have you seen any asset managers interested in IIoT? Specifically conditional monitoring to reduce O&M costs...etc. etc.

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    • 1
Nov 27, 2016
lolercoasterrr:

Thanks for this post - super helpful. A decent number of questions for you:

Do individuals ever specialize in a certain sector (e.g. toll-roads, O&G, renewables) or is every expected to look at everything?

Is utility knowledge useful? Knowledge of utility design, wholesale vs. distribution markets etc. or is that less relevant?

Have you seen any interest toward distributed infra assets? Not so much large scale wind farms but maybe a large portfolio of residential solar assets?

Also... very random question, but have you seen any asset managers interested in IIoT? Specifically conditional monitoring to reduce O&M costs...etc. etc.

Thank you
1. Yes, in many firms you would see people specialising. "Official" specialisation is the team you belong to. Usually separately there will be renewables team, conventional power team, sometimes transport team will be separate, and the remainder (which is mostly utilities) is another team. "Unofficial" specialisation is your experience. If you closed several airport deals in your career, you are more likely to work on the next airport deal even if officially you are not part of that team.
At junior to mid level, migrating from team to team is possible and relatively easy, at least in our firm. Sometimes it is even welcome as to give you broader experience. At more senior level, I haven't seen anyone changing specialisation really.
2. Utility knowledge as you described it would be super useful. Guys who are good with numbers would spend weeks trying to figure out some complex regulation or how the utility sector functions. If you come with this knowledge, it would help you and your team a lot. But note, of course, that you will likely be expert in utility in a particular country so your experience will be relevant for countries with similar regulatory regime. Utilities in some countries are drastically different from others.
3. Haven't seen any interest from infra PE community yet. I guess infra sector is conservative by nature and would not adopt speculative technology until proven OR until has some clear and established government support regime.
4. Same as above. Many infra PE funds would be keen to implement IoT technologies at their portfolio companies (e.g. remote monitoring for pipelines as you mentioned) but I don't see infra PE investing in IoT technology alone any time soon.

Hope it is useful.

Nov 27, 2016

Thank you!

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Nov 28, 2016

Is it unheard of to come from an IB Analyst position in an industry that is not infrastructure or adjacent to it (i.e. Tech)? If my final goal is infrastructure, specifically in the renewable energy space, should I look to switch groups away from Tech or to another firm in an infrastructure related role?

Nov 28, 2016
SF Tech Monkey:

Is it unheard of to come from an IB Analyst position in an industry that is not infrastructure or adjacent to it (i.e. Tech)? If my final goal is infrastructure, specifically in the renewable energy space, should I look to switch groups away from Tech or to another firm in an infrastructure related role?

If it is tech M&A Analyst --> infra Analyst transition, then it would NOT be a problem. Practical knowledge of corporate finance and M&A together with good theoretical knowledge of renewable sector should make you a strong candidate. At an associate level it will be harder but not impossible. At VP/Principal level would be really hard in my opinion.

Nov 28, 2016

incredible post, thank you

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Nov 28, 2016

Thank your for the tutorial post, but let me peel the onion one more layer.

Turning to your Section 1:

  • Introduction to Infrastructure
    When I say investing in infrastructure, I mean investing in such assets as
    Utilities: gas / electricity / water distribution, communications infrastructure
    Transportation: airports, seaports, roads, bridges, rail
    Social infrastructure: hospitals, education facilities, etc.
    Energy related: power plants, oil and gas pipelines, oil terminals, renewable energy assets and such (read on for the discussion about where energy ends and infrastructure begins)*

All of these are fine, but these are infrastructure big projects, a highway or seaport. The major issue for my life is on the local level, the local subdivision infrastructure.

The one infrastructure area here in the U.S. I see dying or dead is subdivision infrastructure development (residential, commercial, or both): the creation of local roads, sideways, walking paths, bicycle paths, sewers, water, electrical, gas, street lights, fire plugs, and internet for new housing or new commercial. Cities/towns no longer have funds or bonds to develop subdivision infrastructure. As the local developer, the cities expect you to also take on the subdivision infrastructure risk and costs, and then grant it for free to the city at the end of construction.

In my experience over the last 4 or 5 years, where this blows up for the infrastructure developer is in two areas. If you are in a medium or large city / town, the developer risk is that you invest in building the infrastructure, and hope to sell enough housing / commercial buildings, or sell completed developed lots prior to any economic or housing pull back. Naturally, finding a bank who will take the risk on a full subdivision after the 2008 - 2010 housing meltdown with you is rare to zero. Infrastructure is now typically done bootstrap. A builder and infrastructure developer come to a working deal to finance a batch of housing, e.g. 10 or 15 per year (or more). The infrastructure is then built on an yearly incremental basis to just match the housing build. A bank will take on this partnership in a medium or large city / town. If you are dealing in a small town, e.g. less than 50,000 in population, it's impossible to find the bank funding to try at all.

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Nov 28, 2016

Great write up, cheers.

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Nov 28, 2016

Very interesting read. Thanks!

Nov 29, 2016

+1 SB. My group in industrials does a surprising amount of infra work that I surprisingly really like. Always cool to see the investor's perspective

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Nov 30, 2016

This was a great read.

I believe that much of the world is in a water crisis that has yet to be recognized as a catastrophe, so I'm starting my MBA with a RE Infrastructure Finance focus next year.

From what I've read, Macquarie is the leader in water infrastructure investment. Have you heard otherwise or of firms that are roughly as invested?

Thanks!

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Dec 2, 2016
PonderingWhileSquandering:

This was a great read.

I believe that much of the world is in a water crisis that has yet to be recognized as a catastrophe, so I'm starting my MBA with a RE Infrastructure Finance focus next year.

From what I've read, Macquarie is the leader in water infrastructure investment. Have you heard otherwise or of firms that are roughly as invested?

Thanks!

Hi and thanks. I don't know much about water sector really. Macquarie with co-investors own Thames Water in the UK (asset worth probably above $15 billion in EV) and at least some of the investors (aat least Macquarie) are reportedly planning to exit soon.

Dec 31, 2016

Global Water Development Partners (Blackstone)

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Dec 2, 2016

I wish I saw these before joining the Infra group. Great job!

I would add Ardian as a another large PE firm focused on these sort of assets.

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Dec 2, 2016
  1. What's your view on the New Normal interest rates and inflation with respect to infra? Are infra guys currently pricing this correctly? When (if) kick-off comes in, how screwed are investors? Recent Fortum acquisition as an example where they bid so low that it's starting to bite. With auctions becoming increasingly popular, the winners curse will prevail. Appreciate that inflation can ofcourse be a good thing here.
  2. Would you recommend jumping from bank at analyst level?
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Aug 7, 2017

.

Dec 8, 2016
AllStateRap:

Thanks for this post. I am wondering how you feel about the odds of moving from an infra/project finance advisory firm (heavy on modelling) to PE without the IB experience.

as with other adjacent sectors, i think odds are the best for analyst->analyst transition (because you are not expected to know much anyway) or at fairly senior level where you can sell your connections and general industry wisdom. At middle roles (associate/VP) it is the hardest as your technical experience likely won't be to the level (in terms of deal making / modelling - modelling can be very different in PF vs PE)

Dec 5, 2016

Nice write-up! kudos!

Quick question, could you kindly shed a bit more light on your view that "Africa is a no at the moment" (for Infra PE) regardless of it large infrastructure deficit (gap) and recent focus on same by African governments? I'd like to know why "it is a no" and your quick views on how to make infra PE type deals flood the African continent in the coming decade.

Dec 5, 2016
AdeAkogun:

Nice write-up! kudos!

Quick question, could you kindly shed a bit more light on your view that "Africa is a no at the moment" (for Infra PE) regardless of it large infrastructure deficit (gap) and recent focus on same by African governments? I'd like to know why "it is a no" and your quick views on how to make infra PE type deals flood the African continent in the coming decade.

Here I will re-iterate what I have stated before: downside protection / stability / low volatility is an essential feature that investors seek in the infrastructure asset class. And that's what is almost impossible to find in most Afraican countries. If you invest in regulated sector / sort of PPP, you won't feel safe or guaranteed anything, because governments are unrealiable (inexperienced at best and corrupted at worst) and legislation in key infrastructure sectors is immature to non-existent.

And if you can't feel that you investments in regulated infra are safe, what can you expect from merchant assets...

So long story short: risks are big / sometime binary / unquantifiable and therefore structuring meaningful downside protection for investments is almost impossible. Hence infrastructure asset class as we know it in the developed world, cannot exist. There are individual investment cases that work out fine, I guess, but overall picture is not good.
And just to be clear: the problems I outlined are not exclusive to Africa. Same problems exist in a number of countries in Asia, South America and Eastern Europe. But as a continent/region, on average, Africa is clearly the worst.

With that being said, I can see how the following players can still invest today:
- Normal PE firms - with higher risk tolerance
- Family offices and other non-institutional investors - because they can find creative solutions that are on the borderline of ethics and law
- Development banks - because they are not punished for losing money in a same way as corporate fund manager would be

What needs to be done? I think it is quite clear. Improve investment climate by taming corruption and developing more robust legislation. Start small and unprofitable (for a particular government), make showcase, start attracting more and more capital at lower and lower returns.

Hope this helps.

    • 1
Dec 5, 2016

Thoughts on Public Finance IB to Infra PE?

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Dec 8, 2016
Uncle Drew:

Thoughts on Public Finance IB to Infra PE?

I am not fully sure what public finance investment bankers are doing I can't see why not. Also let me copy one of my answers above because i think it applies:

as with other adjacent sectors, i think odds are the best for analyst->analyst transition (because you are not expected to know much anyway) or at fairly senior level where you can sell your connections and general industry wisdom. At middle roles (associate/VP) it is the hardest as your technical experience likely won't be to the level (in terms of deal making / modelling)

Dec 15, 2016

Excellent write-up. I have been involved in infrastructure investing for more than a decade, mainly financing deals in emerging markets. In the US the bulk of the infrastructure is financed through local/state and federal governments. PPPs are almost nonexistent. Do you think this could change in the near future?

    • 1
Jan 1, 2017

Great question, also curious about this as well.

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Jan 4, 2017

Hi guys, I am returning to the thread after abandoning it for few weeks. Sorry for that, been crazy times here.

I think the reality is that there are two forces working together:
1. US investment landscape in general and US infrastructure space in particular are some of the most developed in the world, and
2. US investors (who mostly invest in the US) generally have higher risk tolerance than, for example, investors in Europe and Australia

Therefore if a particular infrastructure project is viable, private sector would be happy to take it and fund it in full with private capital - there is no need for government support at all. I think PPP in general is designed to give comfort to the provider of private capital, and in the US such comfort is not really needed because market is robust enough anyway.

And if a particular project is inherently unprofitable, there is no way you can attract private capital, no matter what PPP wrap government puts around it.

Therefore in the US you would mostly see projects financed/owned 100% by public sector or 100% by private money, with very little number of true PPP where public and private sector work together.

This is just my view from my tower in the city of London.

    • 1
Jan 4, 2017

Answered to your question in my reply to Fingerling Potatoes. Cheers!

Dec 22, 2016

Many thanks for this great stuff.
Could you elaborate on the recruitment ? After a quick look, it seems that few project finance guys make it into PE, and that most infra PE juniors come instead from IB. Is that really the case ?

Jan 4, 2017
qsd-aaaa:

Many thanks for this great stuff.Could you elaborate on the recruitment ? After a quick look, it seems that few project finance guys make it into PE, and that most infra PE juniors come instead from IB. Is that really the case ?

Based on my sample, most junior guys come with IB background, or start infra PE right from the university. Among those who break into the industry at senior level, there is higher proportion of people from the industry (e.g. experts in gas, power, transport, etc.).

I have seen few project finance guys but they are less common, not sure why though.

Dec 31, 2016

What do you think about the IFC as a player in this space?

Jan 4, 2017
sheldonxp:

What do you think about the IFC as a player in this space?

From what I understand, IFC (as well as other development investors such as EBRD in Europe) have quite a specific mandate. Probably IFC will only:
- Invest in emerging markets
- Invest only in primary deals (i.e. provide capital for infrastructure development, not just secondary or opportunistic deals)
Returns requirement is probably low (or, rather, it is standard but they are happy to take more downside risk just because their mission is to help develop infrastructure, not only earn return on capital). So within their mandate, they are quite well positioned, I think.

As far as rumours go, IFC invest less and less in funds and more and more directly.

Jan 7, 2017

Hi, thanks a lot for your post - it was very insightful. Most questions have been around getting into Infra PE, my question is regarding exit opportunities. Related questions:
1) For someone who joins as an associate (post MBA) do you think an exit to a traditional PE would become very difficult after, say, 2-3 years?
2) Are downsides in pigeonholing oneself to only one sector, and particularly infra, very high? Will skill sets be fungible across sectors?

Jan 13, 2017

Hi there, thanks for your kind words.

  1. It is not impossible (seen that happening - transition from top notch infra associate to top notch TMT PE associate). But it is not common. Breaking into PE from generalist M&A background will definitely be easier.
  2. The problem is not that skills are narrow in infra. The problem is that everyone THINKS that skills are narrow in infra. Therefore if transferring from infra to something else, e.g. more generalist PE, you will need extra effort to prove that your skills are fully transferable and experience is 100% relevant. In reality the different between regulated utility vs coal power plant vs telecom towers vs oil storage vs airport is HUGE (modelling, commercial view, relevant macro factors, etc.), so if you work on deals in different infra subsectors, your skills and experience will be very diverse and from technical (LBO modelling) and deal-making (due diligence, deal structuring, documentation) perspective there is no fundamental difference to consumer/retail or TMT private equity.
Jan 17, 2017

Great stuff OP, really brings back the memories. After working in RE development for about 5 years, I had a stint overseas working in infrastructure development (social/ transportation PPP's and some power deals) for a sponsor and it blew my mind how complex the models were, how complicated the debt was, and the general level of deviousness compared to real estate. When I came back to the States in 2013 and was back in RE, real estate finance was kid's play.

On a side note, I am curious to what the OP's view on PPP's future is. I got the sense that deal flow in Western Europe was very mature, Canada was moderately mature, and maybe some possibilities in Australia here and there. A lot of people were very interested in US market and thought it was the next big thing but obviously the fact that the US operates largely as 50 different jurisdictions made it difficult for the market to get to a critical mass. I had been shortlisted for a PPP advisory position and at the time was very disappointed I didn't get the position. Looking back I'm glad I didn't get the job as while I think it is a great model for doing infrastructure I am unsure now when the market will take off.

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Jan 20, 2017
greenlander:

Great stuff OP, really brings back the memories. After working in RE development for about 5 years, I had a stint overseas working in infrastructure development (social/ transportation PPP's and some power deals) for a sponsor and it blew my mind how complex the models were, how complicated the debt was, and the general level of deviousness compared to real estate. When I came back to the States in 2013 and was back in RE, real estate finance was kid's play.

On a side note, I am curious to what the OP's view on PPP's future is. I got the sense that deal flow in Western Europe was very mature, Canada was moderately mature, and maybe some possibilities in Australia here and there. A lot of people were very interested in US market and thought it was the next big thing but obviously the fact that the US operates largely as 50 different jurisdictions made it difficult for the market to get to a critical mass. I had been shortlisted for a PPP advisory position and at the time was very disappointed I didn't get the position. Looking back I'm glad I didn't get the job as while I think it is a great model for doing infrastructure I am unsure now when the market will take off.

PPP world is quite a small corner or the total infrastructure investment universe.

Emerging and frontier markets: PPP is present because without it is nearly impossible to attract private capital into social infrastructure projects. However, deal flow is not huge at all.

Most developed worlds like Europe and Australia: PPP is present but for a different reason - valuations are so high and returns are so low that even small underperformance can wipe out economics of the project therefore implicit or explicit downside protection from the government is crucial. This sector is still small,after GFC annual volume of PPP deals in Europe was between EUR 15-20bn and actually trending downwards. I don't have the latest figures but in 2015 total PPP volume in Europe was probably at or below EUR 10bn. Also remember that certain part of those deals is done by construction companies without involvement of financial sponsors at all.

Countries in between such as US (market is robust but returns are not yet stupidly low): Good projects are done by 100% private capital, crappy projects are not interesting to private capital providers. Simple as that. I mean, PPPs exit but as a percentage of total deal flow they are really tiny, and especially unpopular among financial investors.

My view on the future? Looks like situation such as in Europe is end game. Some markets will get there within years, some within decades, some within centuries. But in the end, I am sure situation will be the same: returns are consistently low and any social infra (which inherently has limited upside while downside can be substantial if analysis is done wrong) will be built or operated under PPP regime. Everything else (utilities, transport, telecom, power) will be privately-held and most of the time even unregulated.

    • 1
Feb 11, 2017

Great article. Can you touch on how infra PE engage engineering professionals for advisement and risk management on the deal?

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May 14, 2017

I worked at Macquarie Infrastructure fund (MIRA) for two years. It is by far the largest and most respected fund in the industry. Inbox me if you need any insight on infrastructure investments, m&a and Asset Management.

    • 1
Jun 2, 2017

pm'ed you

Jun 8, 2017

pm'ed you

Oct 5, 2017

pm'ed you

Jul 7, 2017

Hi OV, great read. I'm new to this forum. I have been in the power/utiliy field (lots of transmission, some wind) for most of my career, the last 10 at one of the Big 4, working the in mega-project advisory space. Looking to get out of consulting, and am curious if there's any sort of career opportunity for a guy like me in the infra PE space, particularly with greenfields. Thoughts? Thanks

Aug 14, 2017

I'm joining a PF group at a Biglaw this fall. Is transitioning to business role doable after few years?

Aug 19, 2017

Great stuff, SB'ed! Do you have any thoughts about Morrison & Co (formerly HRL Morrison) - reputation in the industry, culture etc.? https://hrlmorrison.com/ https://en.wikipedia.org/wiki/H.R._L._Morrison%26_CoIt is an Australia and NZ based infrastructure fund manager.

Aug 23, 2017

Thanks for the great post - much appreciated!

I'll try my luck in case you'll return to the thread at some point:

I have recently started working at a economic consulting firm with a strong focus on the energy sector. As you may be aware, firms like ours are hired to provide expertise (e.g. financial analysis to estimate damages owed) for legal disputes between regulators and investors.

I am looking to transition to a infrastructure fund despite being aware that it is probably an uphill battle. I have a strong academic background in finance but limited relevant professional experience.

What do you think would be a good strategy for a successful transition?

Cheers!

Jan 28, 2018

Hey guys,
does anyone here know anything about John Laing? The OP mentions them briefly but there isn't a lot online besides their website and some deal articles on infrastructureinvestor.com.

Would it be a good place to start a career in infra PE? Would an internship there add value to one's CV? How's their reputation?

And ofc, thanks for the awesome article!

Mar 8, 2018

Hi,
I am PhD student in Applied Mathematics & Statistics (Quantitative Finance), SUNY Stony Brook, with previous education and working background from Electrical Engineering and transportation Industry. I am currently looking for a job in PE focusing on the investment in Infrastructure Sector (Transportation, power, etc.). Will you please give me a reference if you come across any opportunity in this area? Thanks a lot!

    • 1
Mar 8, 2018

I greatly enjoyed your post Can we talk about a deal I am structuring? I am on the board of a data center business management business (CoLo..so think Core Plus). We will be raising $250MM of equity. We have expanded from 2 locations last year to now 6 states. We have a massive pipeline of unique payback acquisitions. Given I think this is on a public forum, I'd like to discuss offline. Our CEO made 3x and 10x in his last two deals. We have unique real estate deals that are due to our value-add piece to the picture.

Mar 8, 2018

Lenders want some skin in the game, thus no 100% equity. The costs/terms of back lever if you are pushing 100% sometimes rival or even greater than equity. If the question is about electric utility some, PUC's or state regulators require recommend (require) a certain amount of debt to equity.

Your 4x number is questionable; generally the only infrastructure type company with 100% revenue guaranteed is a power asset with contract PPA. Deals I am looking at in renewable energy can take 100% debt based on a DSCR (& sign PPA's) but you would pay 15x for them.

Mar 8, 2018
Race:

Your 4x number is questionable; generally the only infrastructure type company with 100% revenue guaranteed is a power asset with contract PPA. Deals I am looking at in renewable energy can take 100% debt based on a DSCR (& sign PPA's) but you would pay 15x for them.

the 4x number was just an example as I know utilities in general trade lower than normal companies. But going back to your point - are you saying you can buy a renewable energy company for 15x Ebitda with 100% debt (i.e. 15x leverage) and no equity????? I've never heard of a company being levered 15x, but if that's the case what's stopping people from buying it, if there's no equity required and can finance the whole acquisition by debt?

Mar 8, 2018

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Jul 25, 2018

OP, you forgot to mention about another important player of the infrastructure universe - Sponsor Equity, aka large construction company that invest from their cash on balance sheet. I can tell you that most of them seek returns of >20% IRR depending on when they sell the asset, preferably right after construction, the riskiest phase of the life of an asset. When the construction of an asset is completed in 3 to 5 years, it is considered substantially de-risked, sponsor equity will seek a buyer, usually a fund, for the full ticket of its equity participation.

Aug 14, 2018

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Aug 14, 2018