Last week, the biggest name in private equity – not for the first time – turned its attention to infrastructure. Blackstone’s head of private equity Joe Baratta, excited about the infrastructure opportunities that a Donald Trump presidency could potentially unleash, planted his flag firmly in the sand:
“To be relevant in that end of the market, I think you need to be deploying billions of dollars at a time, not hundreds of millions. So you're probably talking about a vehicle that's 20, 30, 40 billion dollars of equity,” he told Bloomberg TV. When asked if that meant aiming for the largest vehicle ever raised, he added: “Correct. That would be the ambition if this comes to fruition, which we certainly think it will, in terms of the public sector aligning with the private sector to invest in the fabric of this country.”
The largest vehicle to date is Global Infrastructure Partners’ third fund, which closed recently at $15.8 billion. The second-largest is Brookfield’s third infrastructure fund, which closed last summer on $14 billion. Baratta’s upper end effectively dwarfs the two combined. Go big or go home.
In all fairness, Blackstone does tend to go big or go home. In last year’s PEI 300, its five-year private equity fundraising total dwarfed the competition. It raised the largest ever real estate fund in 2015 at, coincidentally, $15.8 billion. But it’s also worth pointing out that, when it first tried to raise a dedicated infrastructure fund – 2009’s Blackstone Infrastructure Partners, targeting $2 billion – that effort petered out at $450 million and ended with its infrastructure team taking the commitments and spinning out into Stonepeak Infrastructure Partners in 2011.
So what’s getting Blackstone so excited about re-entering infrastructure? There are three factors at play here: first, LP demand, as Blackstone president Tony James highlighted in a recent earnings call; second, deaflow, as Baratta stressed in his interview; and third, returns, which James, citing his firm’s $6 billion of investments in infrastructure through several strategies, called “nothing short of spectacular, into the 40 percent IRR range”.
The last of these points is particularly interesting: there’s a tonal shift going on in infrastructure that is seeing much more acceptance – and demand – for high-return, private equity-like strategies. Campbell Lutyens partner James Wardlaw told sister publication Infrastructure Investor that there is “a huge amount of capital available for managers delivering 15 percent-plus IRRs in 2017”, which will benefit private equity-like and late-stage project development strategies.
This is unsurprising at a time when core brownfield equity – the mainstay of lower risk infrastructure investing – is looking fully priced. It is also a reflection of what’s happening to private equity returns.
Late last year, State Street published data from its GX Private Equity Index, covering over $2.4 trillion of investments, and senior managing director Will Kinlaw had this to say: “The last eight quarters have been difficult for all private equity funds. Rolling one-year returns have been in decline since the second quarter of 2014, down from a nearly 30 percent return to single digits.”
Single-digit returns are not really the stuff of private equity dreams, so it’s no wonder Baratta is eyeing infrastructure hungrily. What’s promising, though, is that this interest comes at the same time as the infrastructure market is embracing higher-risk/higher-return strategies.
After all, infrastructure’s biggest obstacle to growth has always been – and continues to be – the supply of assets available. But in previous years, one could legitimately wonder whether LPs were ready to endorse the higher-risk/higher-return strategies needed to develop new infrastructure, given their obsession with core brownfield. That seems to be changing.
If Blackstone’s increased interest in infrastructure captures this higher-return mood and also ends up unlocking more capital for new asset development – as opposed to just unlocking new capital for brownfield value-add – then that will be a very good thing indeed.
Now we just need Donald Trump to deliver on that $1 trillion infrastructure programme.
PS. Keep an eye out for our in-depth with Joe Baratta coming soon.