Christopher BealeManaging Partner,Alinda Capital Partners
1. Since you went to market with your just closed, $3 billion infrastructure fund, other banks—notably Goldman Sachs, which raised $6.5 billion—have hit the market with infrastructure funds. But your firm was among the first. What was the reception like among limited partners?
We went to market in September 2005, with a billion on the cover. We were the first infrastructure fund to launch in the United States even though this has been an investment strategy in Australia, the United Kingdom and Canada for 10 years or more. I think we were well received, as we ended up raising $3 billion. But I think the other investors entering the market [including Citigroup, Credit Suisse, Goldman Sachs and Macquarie] reinforced in the minds of investors that there might be a significant opportunity in infrastructure in the United States.
2. How do most U.S. LPs approach infrastructure, an area where they have limited experience? In Australia, for example, they’re much more familiar with the asset class.
In Australia, certain investors have been investing in infrastructure for 10 years or more. They know the asset class very well. Big institutions there typically are 5 percent to 10 percent invested in infrastructure. Here that figure would be zero or close to it. We found only one institution in the United States that already had an allocation to infrastructure. [The money our limited partners committed to our fund] came from different pots or they created one.
3. What kinds of assets will you be investing in?
We’re looking at roads, airports, water, utilities, and waste-water treatment. We’ve bought three gas utilities from Kinder Morgan, we have a transaction pending in Canada to buy over a million water tanks from an income trust, we’ve bought five small roads that include the Detroit-Windsor Tunnel, and four toll bridges in Alabama. Over a third of the capital is already committed.
4. Is it hard to find an exit?
There’s plenty of precedence for full or partial exits for infrastructure assets demonstrated in Australia, the United Kingdom and also North America. Buyers could include income funds, institutional investors such as pension funds on a direct basis, and strategic buyers. There’s also IPO possibilities.
5. Infrastructure appears to have a high barrier to entry, keeping out traditional buyout professionals. What are the main differences between infrastructure deals and buyout deals, infrastructure leverage and buyout leverage?
First, these are long-term investments. A typical hold period is 10 to 20 years. A buyout firm has a short to intermediate focus. Infrastructure funds may not offer the returns that LBO firms would hope to achieve in buying and selling in three years. Also, infrastructure deals require capital for expansion, while most LBO firms are trying to take capital out. [Infrastructure deals also involve] a lot of complex structuring and long-term contracts. The leverage is also different from other asset classes. The leverage tends to be long-term, fixed rate. And [the amount] tends to be lower than buyouts leverage because it tends to be investment-grade. LBO leverage tends to be short term and to include high-yield debt.