GP Profile: Alinda Copes With Drought Of U.S. Deals

Executives at Alinda Capital Partners LLC have managed to stay relatively busy even as the expected avalanche of deals in U.S. transportation, utilities, and other infrastructure assets never materialized. The trick has been to avoid large, auctioned transactions, to be willing to buy assets abroad, and to finance its deals with investment-grade bonds.

In its latest deal this April, the New York-based infrastructure specialist bought NorTex Gas Storage Co. LLC, a Houston-based owner and operator of natural gas storage facilities, for $500 million. The company joins a portfolio that also includes includes American Roads LLC, an owner-operator of five roads and bridges, including the Detroit-Windsor Tunnel, a highway tunnel connecting Detroit with Windsor, Ontario; and Santa Paula Water LLC, a wastewater treatment facility in California. All told, the firm has made 18 acquisitions in total, six of which are in the United States. Other investments are in Canada, the U.K. and the Netherlands. As a result, the firm is already investing from its second fund, a $4 billion pool closed in February, having largely exhausted a debut fund of $3 billion raised in 2005.

Managing Partner Chris Beale, the former global head of project finance at Citigroup, and his partners had already seen privatization of infrastructure gain favor in the U.K., Australia, Europe and Latin America when they set out to raise the debut fund. They sensed that America had no choice but to follow suit as cash-strapped cities, counties and states struggled to maintain aging roads, bridges, water treatment facilities, and other infrastructure. The American Society of Civil Engineers in 2005 warned of a looming crisis and estimated an investment need of $1.6 trillion from the government and the private sector. Alinda Capital was out in front of the trend, and it wasn’t alone. Banks including Goldman Sachs, Morgan Stanley and UBS joined buyout shops such as The Blackstone Group, The Carlyle Group, and Kohlberg Kravis Roberts & Co. in a rush to raise funds targeting infrastructure in the U.S. and elsewhere.

But for a number of reasons, opportunities in the United States haven’t materialized to the extent envisioned. “You would think this would be the perfect time for large-scale creation of privatizations and creation of public-private partnerships and concessions,” Beale said. “But it’s only been a trickle.”

Political opposition has played a big part in curbing the privatization movement. Beale observed that in 1992, the United Kingdom implemented the Private Finance Initiative, which created a framework for funding public infrastructure projects with private capital across the country. In the United States, by contrast, it’s not that simple. Each state presents its own complicated dynamics, often with opposition to privatization from politicians and labor groups. Alinda Capital, which controls assets in 18 different states, has seen situations where Democrats in one state oppose a Republican administration pushing for privatization, while Republicans in another state oppose Democrats who are trying the same thing. “All of a sudden there was a framework for the whole country to do these types of deals” in the United Kingdom, Beale said. “Here we have 50 states, so it’s like dealing with 50 different countries.”

Two highly publicized privatization deals that collapsed also helped to slow the trend. In 2008, amid the widening credit crisis, a Citigroup-led consortium withdrew its $12.8 billion bid to lease the Pennsylvania Turnpike for 75 years after state legislators allowed the offer to expire. Citi suffered another big black eye in 2009, when it failed to corral financing for its $2.5 billion deal to privatize Chicago’s Midway International Airport. “Those two deals put a damper on public officials’ appetite to look at transactions at least until the financial crisis was over,” Beale said.

With deal flow just not there, limited partner demand for infrastructure funds slowed considerably. Infrastructure firms worldwide raised just $10.7 billion in 2009—a 57 percent drop from the $24.7 billion raised in 2008, and nearly 70 percent less than the $34.3 million raised in 2007, according to Probitas Partners, a placement agency. (The market rebounded somewhat in the first quarter of 2010, with infrastructure funds raising $5.9 billion). Blackstone and KKR have struggled to raise their funds, and 25 funds either abandoned or delayed fundraising in the 18 months ended June 30, 2009, according to trade magazine Pension & Investments.

Removing Obstacles

Alinda Capital, with five partners and 40 investment professionals altogether, typically invests $300 million to $500 million per deal (and $500 million to $1.5 billion per year), in North American and Western European assets related to transportation, utilities, and what Beale calls “contracted assets.” These are assets that hold long-term contracts—essentially giving them a monopoly—to provide essential services to communities; Santa Paula Water, for example, has a 30-year contract to own and operate a wastewater treatment facility for Santa Paula, Calif.

Its modus operandi is to identify assets that provide bottleneck relief for densely populated areas—say, a bridge that provides a faster path than alternative routes, even in poor economic times. “If you have really good local demand, and if the alternate route is not right next door, and if people have to spend a lot more time and burn a lot more gas, you can work out what the value is for that shortcut,” Beale said. The firm’s funds have 10-year lives, and although it has already banked some realizations, Alinda Capital expects to hold most assets for about 10 years.

Infrastructure, as Beale himself will say, is a long-term, even boring asset class. Unlike a typical LBO firm outlook of three to five years, Alinda Capital’s bet on American infrastructure rests on what Beale calls a 20-year to 40-year trend. In dealing with increasingly decrepit infrastructure, local governments are increasingly facing a choice of raising taxes for maintenance, entering into a private sector concession, or simply delaying maintenance. Beale said most pick the third option, but believes that can’t continue forever. Beale declined to discuss the firm’s target investment return in detail, but a source close to Alinda Capital said Fund I has generated a 6 percent gross IRR, while Fund II has generated a gross IRR of more than 20 percent.

Bill Atwood, executive director of the Illinois State Board of Investment, which committed $100 million to both Alinda Capital funds, credits at least part of the firm’s success putting money to work with its focus on mid-market transactions. Unlike infrastructure behemoths such as Australian Macquarie or Citi that chase multi-billion deals, Alinda Capital is looking for mid-market deals that don’t rely on municipal auctions. Atwood sees the firm as complementary to Macquarie, which Illinois also backed. Of Alinda Capital’s 18 acquisitions, only one—a water utility in England—was acquired via auction, according to the firm. “Alinda was doing more down-market, more proprietary transactions,” Atwood said.

A long-term debt financing strategy has also benefited the firm. Alinda Capital has primarily financed its deals with investment-grade bonds with maturities of as high as 30 years. Some rival infrastructure funds, by contrast, finance deals with short-term bonds and other debt. The longer maturities eliminate the rollover risk of short- and medium-term financing, Beale said. Alinda Capital will typically finance its deals with 50 percent debt, the standard for infrastructure investing. A third aspect of Alinda Capital’s strategy that helped it survive the dearth of U.S. deals has been the ability to invest outside of the United States—two-thirds of its acquisitions have taken place outside of the United States—although Beale believes heavier deal flow is just a matter of time.

“We used to have the best infrastructure in the world,” Beale said. “In the long run, my belief is that…this is a very long-term trend that is going to occur and that private capital is needed to rebuild America’s infrastructure.”