Private equity firms are turning to infrastructure investing now that the credit crisis and deepening recession have put their traditional leveraged buyout businesses into suspended animation.
Some of the biggest names in the private equity field — Carlyle Group, Kohlberg Kravis Roberts & Co. and Blackstone Group — are raising infrastructure funds that can deploy large amounts of capital.
Between $120 billion and $170 billion has been raised by global infrastructure funds over the past two years, according to Ernst & Young LLP estimates.
Australian companies Macquarie Group and the soon-to-be-defunct Babcock & Brown Ltd. were among the first to start infrastructure investing units. They were followed by investment units at major U.S. investment banks, including Goldman Sachs Asset Management, JPMorgan Asset Management and Morgan Stanley Investment Management. Even a few real estate investment firms such as Starwood Capital Group LLC and RREEF Alternative Investments got into the game.
Now, it's private equity's turn.
“Infrastructure is a rapidly evolving asset class.” said Kathryn Leaf Wilmes, principal in the infrastructure business of Pantheon Ventures Inc., a San Francisco-based private equity fund of funds manager. “In 2006, there were a number of bank-sponsored funds ... that came to market. Most recently, traditional private equity groups are sponsoring infrastructure vehicles.”
Private equity firms with infrastructure funds in the market today tend to have experience investing in infrastructure or infrastructure-related assets, she said. Their executives learned hard lessons during the infrastructure bubble years of 2006 to 2008.
“There was a bit of a bubble with some groups overpaying and overlevering assets,” Ms. Wilmes said. Investors learned that different infrastructure investments behave differently. For example, ports and tollroads are more sensitive to economic growth. During this time, business models based on fee generation rather than investment returns were discredited.
In the past two years, most of the dollars raised for infrastructure funds have been invested outside of the United States, but the credit crisis is pushing states to enact legislation that would enable infrastructure funds to invest in large domestic projects, opening up the U.S. market.
“People need a burning bridge before they act and the bridge is burning,” said Mike Lucki, global infrastructure leader with , New York.
Carlyle — the first private equity firm to diversify into infrastructure — raised a $1 billion fund last year. Carlyle also partnered with Riverstone Group, closing two funds in 2007 with a combined $4.5 billion for energy-related infrastructure. However, Carlyle has been seeking to become a diversified asset management shop almost from its inception.
KKR started its global infrastructure investment business in May 2008, tapping Marc Lipschultz, member and global head of both the energy and infrastructure teams, to lead the effort. The firm is seeking to raise $4 billion for the KKR Infrastructure Fund, according to Preqin Ltd., a London-based alternative investment research firm.
Blackstone is marketing its first infrastructure fund, Blackstone Infrastructure Partners, for which officials hope to raise $3 billion to $5 billion. Although this is its first fund, Blackstone has been investing in infrastructure for two years, sources say.
Elsewhere, Neuberger Berman Group LLC, New York, has restarted the infrastructure investment unit that former parent Lehman Brothers Holdings Inc. started building before the bank went bankrupt last September. Emil W. Henry Jr., a former assistant treasury secretary who joined Lehman Brothers in July 2007, is preparing to raise money for a new Neuberger Berman fund this year, sources said.
Other private equity firms starting infrastructure businesses include Oaktree Capital Management LP, 3i PLC, Madison Dearborn Partners LLC, First Reserve Corp., Lone Star Funds, Charterhouse Capital Partners,, Park Square Capital LLP and Cinven, sources say.