KKR & Co. set high expectations in 2008 when it formed a group to invest in toll roads, ports and pipelines. It aimed to raise as much as $4 billion and hired George Bilicic, the Lazard Ltd. banker on the firm’s record buyout of power producer TXU Corp., to lead the effort.
“Infrastructure is a multitrillion-dollar global marketplace with enormous need for private investment,” KKR co- founders Henry Kravis and George Roberts said at the time, calling the fund a “logical extension” of their leveraged- buyout business.
Almost two years after the launch, New York-based KKR hasn’t announced any major investors or made an infrastructure acquisition, while Bilicic returned to Lazard within a few months, Bloomberg BusinessWeek reported in its March 15 edition. Blackstone Group LP cut fees on its fund to attract investors. Deutsche Bank AG and Citigroup Inc. have also struggled.
The firms see infrastructure funds as a way to provide states and cities with much-needed capital to maintain crumbling facilities in return for revenue that’s less vulnerable to the kind of slump that hit traditional leveraged buyouts from mid- 2007 through last year. The gap between what governments are expected to allocate on infrastructure and what they’ll need to spend in the next five years is $1.1 trillion, according to the American Society of Civil Engineers in Reston, Virginia.
Infrastructure transactions fell to a four-year low of 130 in 2009, according to research firm Preqin Ltd., amid a lack of investor interest in new funds and credit from banks. Private- equity firms raised $246 billion for all strategies last year, the least since 2005, according to the London-based firm.
Not Giving Up
KKR and Blackstone said they are committed to making infrastructure investments and expect their expertise in running companies to make the funds successful.
“The global need for these investments, combined with the more limited availability of capital from traditional sources such as governments, will drive significant demand for private capital in infrastructure,” said Raj Agrawal, a member of KKR’s infrastructure team based in Palo Alto, California.
Monica Orbe, a spokeswoman for New York-based Lazard, declined to comment.
As buyout firms and banks waded into public projects, overly optimistic projections and high leverage led to mistakes and public protests.
“Aggressive operating and financial assumptions, in times when debt was cheap, resulted in acquisitions that had little or no pricing discipline,” said Dunia Wright, head of U.S. and Europe for Industry Funds Management Ltd., an Australian firm that oversees $19 billion, including infrastructure investments.
Politicians Out-Gunned
At the same time, there has been public backlash against Wall Street buying up Main Street. In Chicago, Mayor Richard Daley was criticized last year after leasing 36,000 parking meters for 75 years to an investor group led by Morgan Stanley. The new operators quadrupled some meter rates and eliminated free parking on Sundays -- moves that outraged drivers and local officials.
“Putting us against the investment banks in a deal like that is like having little leaguers play the New York Yankees,” said Alderman Thomas Allen of Chicago’s 38th Ward, who has proposed an ordinance requiring a mandatory 15-day review period for similar agreements. Carissa Ramirez, a spokeswoman for New York-based Morgan Stanley, declined to comment on the parking- meter deal.
More Success Globally
The marriage of private equity and infrastructure has worked better outside the U.S., where Sydney-based Macquarie Group Ltd. pioneered the concept of raising money from investors to buy roads and utilities. Global Infrastructure Partners, created by Zurich-based Credit Suisse Group AG and General Electric Co. of Fairfield, Connecticut, has been running London City Airport successfully since 2006. It took over Gatwick Airport last year.
In the U.S., private-equity firms began to focus on infrastructure in 2005, after Chicago turned over a 7.8-mile (12.6-kilometer) elevated road known as the Chicago Skyway to a group that included a Macquarie-managed fund. The 99-year, $1.8 billion agreement, the first major privatization of an existing U.S. highway, led to a surge of infrastructure fundraising that peaked at $34.3 billion in 2007, according to San Francisco- based consulting firm Probitas Partners Inc.
The flood of capital produced a series of missteps.
Deutsche Shipping Deal
Deutsche Bank acquired Maher Terminals, which operates shipping facilities in Port Elizabeth, N.J., for its North America infrastructure fund, for $2.1 billion in 2007. The Frankfurt-based lender planned to sell its interest to outside investors. As shipping volume plunged amid the worldwide recession, the bank found few takers.
Deutsche Bank took a charge of $205 million after shifting Maher Terminals in 2008 to its corporate division from its group that manages alternative assets. Ted Meyer, a spokesman for Deutsche Bank, declined to comment.
“Investing in infrastructure can’t be just a financial play,” said Stephen Mentzines, head of Macquarie Capital Funds in North America. “It takes sector expertise and the ability to operate assets.”
In early 2009, Chicago canceled plans to lease Midway Airport for 99 years when a group of investors including Citigroup failed to raise financing. Danielle Romero-Apsilos, a spokeswoman for the New York-based bank, declined to comment on the Midway transaction.
Florida Railroad
Fortress Investment Group LLC has struggled with a $3.5 billion buyout of Florida East Coast Railway in 2007 by one of its private-equity funds. The firm was counting on the Florida legislature to finance a rail corridor running between Jacksonville and West Palm Beach. The money hasn’t been forthcoming.
Fortress, based in New York, has done better with its $450 million investment in Florida’s RailAmerica Inc. The firm was able to distribute some profits to investors after taking the company public last year. Lilly Donohue, a Fortress spokeswoman, declined to comment.
“To create sustainable value, you have to have the right focus on risk and drive incremental value through operational engagement,” said KKR’s Agrawal. The firm has continued to hire infrastructure executives, adding Jesus Olmos Clavijo from Spanish utility Endesa SA and Simon Hipperson, who headed the infrastructure arm of Skanska AB, Sweden’s biggest builder.
Blackstone, the world’s largest private-equity firm, recruited executives from Macquarie in 2008 and moved one of its long-time managing directors, David Tolley, to its infrastructure group. The New York-based firm closed on $200 million in commitments to the fund in February after reducing its cut of investment profits to 10 percent from 15 percent, according to a person with knowledge of the matter.
Stimulus May Help
Federal stimulus efforts may give Wall Street a chance to find its footing. The U.S. Transportation Department is set to receive $4 billion to help create a so-called infrastructure bank that would “effectively leverage non-federal resources, including private capital,” according to the budget President Barack Obama submitted to Congress in February.
“The public sector absolutely needs a capital partner,” said Tolley, a Blackstone senior managing director.
Christine Anderson, a spokeswoman for Blackstone, declined to comment on specifics of the fund because the company is still raising money from investors.
Past mistakes may have taught private-equity firms better ways of doing these deals.
Connecticut Model
An infrastructure fund managed by Washington-based Carlyle Group, the world’s second-biggest private-equity company, in November inked a $178 million public-private partnership to manage 23 service areas along Connecticut’s highways for 35 years. The Washington-based firm didn’t use any leverage, and it worked to win the support of state departments of transportation and environmental protection, as well as community groups and labor unions. Carlyle said it may serve as a model for future transactions.
“A lot of people have come to talk to us about it,” said Robert Dove, co-head of Carlyle’s infrastructure group. “There continues to be a real interest in bringing the private sector in.”