Goldman Sachs Raises $6.5B Infrastructure Fund

Firm: Goldman Sachs Group

Fund: GS Infrastructure Partners I LP

Target: $3 billion

Amount raised: $6.5 billion

Minimum investment: $5 million

Goldman Sachs Group, which has long advised governments on the privatization of their roads and bridges, is now ready to take them off their hands.

Goldman Sachs Capital Partners last month closed its GS Infrastructure Partners I fund, a $6.5 billion behemoth that puts distance between Goldman and a number of other U.S. firms entering the burgeoning infrastructure buyouts market. The fund represents the largest single-purpose pool ever assembled by a diversified player, and it’s believed to be the second-largest dedicated fund behind Greenwich, Conn.-based First Reserve Corp.’s $7.8 billion fund geared exclusively to energy buys.

Goldman Sachs put $750 million of its own capital into the fund, and drew on minimum-$5 million commitments from pensions, banks and insurance companies for the remainder. A spokesperson for the New York-based investment house did not return a call seeking to learn the identity of the fund’s limited partners.

The firm plans to invest in bridges, ports and highways, as well as gas, water and electrical utilities. In a statement announcing the closure, Goldman Sachs said it intends to deploy the capital mainly in North America and Europe. It will probably find stiff competition abroad, especially since Bahrain’s Gulf One Bank is reportedly raising a $10 billion infrastructure fund of its own.

Infrastructure has become a popular play among LBO firms, and for good reason. The American Society of Civil Engineers recently estimated that $1.6 trillion should be invested to repair and maintain the nation’s aging infrastructure, and states are considering hiring private companies to construct and manage more than $34 billion in toll roads, according to the Federal Highway Administration.

Increasingly, cash-strapped state and local governments, following the example of foreign governments, have turned to private consortiums to take over public assets. Often they sign long-term leases and concession agreements that off-load financial and maintenance responsibilities.

By collecting tolls or charging usage fees, private operators can obtain significant rewards. For instance, Australia-based Macquarie Bank, considered the worldwide leader in infrastructure investment, reported an annual return of more than 19 percent between 1996 and 2004 on its publicly traded infrastructure fund.

Private equity is paying attention. The Carlyle Group has raised at least one-third of its target $1 billion infrastructure fund. Morgan Stanley is in the midst of assembling a $3 billion stockpile for infrastructure deals, while in June Credit Suisse and General Electric announced a joint $1 billion fund.

As recently as six months ago, Goldman Sachs placed the target for its infrastructure fund at $3 billion. That it raised more than twice that amount indicates how enthusiastic investors have become.

“These funds are driven by the significant demand for the infrastructure asset class from a long list of toll road companies, pension funds, insurance companies, construction-engineering firms, private equity funds, as well as potential public entities,” Mark Florian, the chief operating officer of Goldman’s Municipal Finance and Infrastructure Group, told a congressional transportation subcommittee last year during a hearing on the future of transportation financing. “These investors seek steady long-term returns.”

Already, Goldman Sachs has begun putting the fund to work. In June, it led a consortium including the government of Singapore and the Ontario Municipal Employees’ Retirement System in the £2.8 billion leveraged buyout of U.K.-based Associated British Ports. And in August, it joined a host of private equity firms and management in the pending $22 billion LBO of Houston-based pipeline owner Kinder Morgan.

Even before this recent activity, Goldman Sachs was no stranger to infrastructure investing, serving as the financial advisor in two landmark deals: the state of Indiana’s $3.8 billion, 75-year lease of the 157-mile Indiana Toll Road earlier this year and Chicago’s 99-year, $1.83 billion lease of the Skyway bridge in 2005. A joint venture of Spanish construction giant Cintra and Macquarie won the bidding for both leases.

In a show of Goldman’s muscle as a buyer, it used its infrastructure fund to outbid Macquarie for ownership of Associated British Ports.—J.H.