In­fra­struc­ture In­vest­ment Booms

L'Opinion - - The Wall Street Journal - Mi­riam Gott­fried

Pri­vate-equi­ty firms are on track to raise a re­cord amount for in­fra­struc­ture in­ves­ting in 2018, as mo­ney ma­na­gers bet on the gro­wing need to up­grade and ex­pand the world’s rail­roads, na­tu­ral-gas pi­pe­lines and da­ta cen­ters. The firms col­lec­ti­ve­ly rai­sed $68.2 bil­lion in the first three quar­ters of the year, up 18 % over the same per­iod in 2017 and al­rea­dy sur­pas­sing the $66.2 bil­lion they amas­sed in all of 2016, ac­cor­ding to da­ta from Pre­qin. Lea­ding the charge are KKR & Co., Sto­ne­peak In­fra­struc­ture Part­ners and I Squa­red Ca­pi­tal, which each rai­sed a rough­ly $7 bil­lion in­vest­ment ve­hicle this year.

The num­bers are set to swell even more as the to­tal doesn’t in­clude the $5 bil­lion rai­sed so far by Blacks­tone Group LP in the ini­tial phase of its plan­ned $40 bil­lion in­fra­struc­ture fund. Meanw­hile, two in­fra­struc­ture po­we­rhouses, Glo­bal In­fra­struc­ture Part­ners and Brook­field In­fra­struc­ture Part­ners, which rai­sed $15.8 bil­lion and $14 bil­lion funds, res­pec­ti­ve­ly, in 2016, are al­rea­dy tar­ge­ting new pools of rough­ly $20 bil­lion each.

Ins­ti­tu­tio­nal in­ves­tors such as pen­sion funds have been al­lo­ca­ting more mo­ney to in­fra­struc­ture, at­trac­ted by its re­pu­ta­tion for stea­dy re­turns, which ty­pi­cal­ly fall bet­ween sa­fer fixed-in­come se­cu­ri­ties and ris­kier pri­vate equi­ty. That is es­pe­cial­ly ap­pea­ling with in­ter­est rates still near his­to­ri­cal­ly low le­vels and equi­ty prices close to all-time highs.

Achie­ving those re­turns, ho­we­ver, is no slam-dunk. There is now a lot of cash cha­sing a li­mi­ted num­ber of op­por­tu­ni­ties, which has led to wor­ries that in­fra­struc­ture funds will struggle to find places to put their bil­lions to work or pay too dear­ly to do so. But pri­vate-equi­ty of­fi­cials argue that tech­no­lo­gi­cal change in te­le­com­mu­ni­ca­tions and ener­gy and the need to up­grade aging rail­ways and other trans­por­ta­tion as­sets create more than en­ough de­mand for their ca­pi­tal.

The U.S. is the lar­gest mar­ket for ener­gy-in­fra­struc­ture as­sets, which by and large aren’t ow­ned by the go­vern­ment. The ener­gy in­dus­try’s fra­cking re­vo­lu­tion and the coun­try’s shift to being a net ex­por­ter of na­tu­ral gas, as well as the boom in green-ener­gy pro­jects, have crea­ted new op­por­tu­ni­ties for in­vest­ment. KKR said in Ju­ly it had agreed to ac­qui­reDis­co­ve­ry Mid­stream Part­ners, which ga­thers and pro­cesses na­tu­ral gas, for about $1.2 bil­lion through a new­ly for­med joint ven­ture with ener­gy com­pa­ny Williams Co s. The di­gi­tal re­vo­lu­tion, meanw­hile, has at­trac­ted at­ten­tion to U.S. te­le­com­mu­ni­ca­tions as­sets like cell to­wers and da­ta cen­ters. In June, Brook­field agreed to buy 31 of AT&T Inc.’sda­ta cen­ters in a deal worth $1.1 bil­lion. The firms with the lar­gest funds argue that their gro­wing scale creates new op­por­tu­ni­ties by gi­ving them ac­cess to deals smal­ler funds couldn’t do. Blacks­tone is loo­king at as­sets that enable it to in­vest at least $1 bil­lion, in­clu­ding a num­ber of pu­bli­cly tra­ded com­pa­nies, ac­cor­ding to a per­son fa­mi­liar with the buyout firm’s stra­te­gy.

The fun­drai­sing spree comes des­pite a lack of pro­gress on in­fra­struc­ture le­gis­la­tion in Wa­shing­ton. Pre­sident Trump cam­pai­gned on the pro­mise of a $1 tril­lion plan for U.S. in­fra­struc­ture and rol­led out a pro­po­sal ear­lier this year. The ini­tia­tive fa­ced congres­sio­nal op­po­si­tion from the out­set in large part be­cause it would re­quire states and ci­ties to come up with their own mo­ney for im­pro­ving high­ways, air­ports and wa­ter sys­tems. The White House has since shif­ted its fo­cus to other prio­ri­ties such as trade. In Ju­ly, Sto­ne­peak an­noun­ced that DJ Grib­bin, for­mer­ly Mr. Trump’s top in­fra­struc­ture ad­vi­ser, would join the firm as a se­nior ope­ra­ting part­ner.

Funds such as those run by Sto­ne­peak and Blacks­tone, which are pri­ma­ri­ly concen­tra­ted on North Ame­ri­ca, say they will li­ke­ly fo­cus more on ener­gy and te­le­com than on trans­por­ta­tion, much of which falls in­to the pu­blic-as­set ca­te­go­ry.

In the U.S., pri­va­ti­zing pu­blic as­sets like toll roads, bridges and air­ports has long been dif­fi­cult be­cause of cheap fun­ding al­ter­na­tives such as mu­ni­ci­pal debt and the chal­lenges of na­vi­ga­ting lo­cal po­li­tics. But other spheres of the in­fra­struc­ture mar­ket are flou­ri­shing, deal ma­kers say.

“If you want to pri­va­tize a toll road in a ma­jor ur­ban ci­ty in the U.S., that be­comes a ve­ry dif­fi­cult tran­sac­tion to do,” said Ro­bert Pal­ter, co-lea­der of the glo­bal ca­pi­tal pro­jects and in­fra­struc­ture prac­tice at consul­ting firm McKin­sey & Co. “If you tal­ked about a dif­ferent va­rie­ty of in­fra­struc­ture such as ac­qui­ring pri­vate ports or rail­roads, those are deals that are get­ting done.”

Go­vern­ments out­side the U.S. are more open to pri­vate ca­pi­tal, gi­ving firms such as GIP, Brook­field and KKR with glo­bal funds the op­por­tu­ni­ty to pri­va­tize as­sets there. GIP bought three U.K. air­ports, two of which it still owns, and trans­for­med their ter­mi­nals in­to shop­ping malls. Ma­ny large trans­por­ta­tion deals abroad in­volve as­sets that are not go­vern­ment ow­ned. In April, GIP pur­cha­sed Ita­ly’s se­cond-lar­gest high-speed train ope­ra­tor, known as Ita­lo, for €1.98 bil­lion ($2.3 bil­lion). There have been some examples of U.S. pu­blic-pri­vate part­ner­ships. Car­lyle Group LP is in­ves­ting in the re­de­ve­lop­ment and ex­pan­sion of Ter­mi­nal 1 at New York’s John F. Ken­ne­dy Air­port, for example. Some are still hol­ding out hope that the funds will be put to use fixing Ame­ri­ca’s pro­blem-pla­gued pu­blic-trans­por­ta­tion sys­tems.

“In the end, the rea­li­ty is that U.S. in­fra­struc­ture is still woe­ful­ly main­tai­ned,” said Mark Weis­dorf, the for­mer chief exe­cu­tive of the in­fra­struc­ture-in­vest­ments plat­form at J.P. Mor­gan As­set Ma­na­ge­ment, who now runs a stra­te­gic­con­sul­ting firm. “Even­tual­ly stuff gives and things hap­pen. That ca­ta­lyst may still come.”


In April, pri­vate-equi­ty firm GIP pur­cha­sed Ita­lo, the Ita­ly’s se­cond-lar­gest high-speed train ope­ra­tor.

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