KKR Joins Traffic In Infrastructure Sector

Kohlberg Kravis Roberts & Co. has entered the increasingly populated field of infrastrcture investing, joining a number of other firms looking to make a profit on the reconstruction of decaying roads, bridges and power plants.

The buyout firm recently hired George Bilicic, the former head of Lazard’s global efforts in the power, energy and infrastructure sectors, to head the investment team. The firm plans to raise a fund of around $5 billion, although it hasn’t yet settled on on a target.

With its inaugural infrastructure fund, KKR intends to target physical assets, or companies that own physical assets, that aren’t exposed to commodity price fluctuations and economic cycles, Bilicic told Buyouts. Examples of such assets include regulated utilities, toll roads, ports and gas pipelines.

KKR plans to fill out the team by recruiting current and former industry executives, as well as executives from other infrastructure funds and banks. The firm will also lean heavily on its own investment professionals with deep industry knowledge across a wide sector of the economy. The team will look for deals in the United States, Europe and Asia.

Infrastructure has emerged as a hot sector in the last few years, with firms such as the Carlyle Group, Goldman Sachs and Morgan Stanley raising dedicated funds. The Blackstone Group is also investigating whether it should raise a dedicated infrastructure fund, as well as other sector-specific funds, as recently reported on PE Hub, a sister publication.

But Bilicic told Buyouts that demand for private investment is so acute that there is plenty of room for more investors. The American Society of Civil Engineers, for example, gave the U.S. a “D” in its 2005 study of utility grids, bridges and other infrastructure, and estimated that there’s a $1.6 trillion backlog of projects. “If you look at investment needs in this area, it’s not a crowded market,” Bilicic said.

The firms are attracted to the possibility of consistent, low-volatility returns, typically averaging about 10 percent. A number of big limited partners, including the California Public Employees’ Retirement System, have established new allocations to infrastructure funds. Other LPs, including the New Jersey Division of Investment, have balked at infrastructure funds, arguing that the modest returns can’t justify the fees and carried interest that firms typically charge.

At one time, infrastructure targets were almost exclusively located overseas, where national governments privatized toll roads, airports and other public facilities. In recent years, local governments in the United States, facing big shortfalls in construction budgets, began to follow suit. Just last week, an investor group led by Citigroup agreed to a 75-year, $12.8 billion lease of the Pennsylvania Turnpike.

The new team hopes to establish a reputation as an investor that works with constituencies and has clear plans to improve and continually invest in assets during its ownership, Bilicic said. KKR and TPG employed such tactics last year during their negotiations to acquire Texas utility TXU Corp., when the firms won over environmental activists by agreeing to scrap plans to build a series of coal-fired power plants. KKR’s recently announced partnership with the Environmental Defense Fund to measure the environmental performance of the firm’s portfolio companies was also a product of those negotiations, as previously reported in Buyouts.