AIG Highstar closes $3.5bn infrastructure fund

Infrastructure-focussed AIG Highstar Capital has closed its third fund on $3.5 billion (€2.4 billion), including $800 million for co-investments. The fund is twice the size of its initial target, and more than four times the size of its predecessor, which closed on $800 million in June 2005.

Chris Lee

AIG Highstar Capital III closed after nine months in the market. Around 90 percent of Highstar II’s limited partners returned for the new fund. The fund also brought in a significant number of new LPs, who account for 66 percent of the total number of investors. AIG Investments committed 10 percent of the new fund, as it did in Highstar's previous fund.

Highstar has used AIG's in-house placement agent for all three of its funds. For the third fund, Highstar also tapped an outside placement agent, Merrill Lynch, to help expand its LP base.

Highstar raised $406 million for its first fund in 2000. AIG contributed $150 million to that fund, which Highstar raised at a time when there was “zero interest” in infrastructure among LPs, said Highstar founder and managing partner Chris Lee.

Since then, increasing investor interest in infrastructure, particularly among Canadian and European pension funds, has allowed Highstar to raise dramatically larger successor funds. And as one of the older infrastructure players, Highstar has been well-positioned to take advantage of the buzz currently surrounding infrastructure.

“We’ve been at this since 2000, and other than Macquarie there is really no one else that has a long-term, sustainable track record,” Lee said.

The fundraising process for Highstar's latest vehicle was also helped by the fact that the fund made several high profile deals early on worth a total of $1.6 billion.

“We were not marketing a blind pool, but a fund that had a billion six in very attractive assets,” Lee said. “There was an extraordinary demand.”

Among these assets were Ports America, which Highstar bought from Dubai Ports World this March, as well as US-based port operators AMPORTS and MTC Holdings, acquired this spring. Highstar III had also acquired two US waste management companies, and backed the management buyout of energy distribution company Kinder Morgan.

The new fund's size will not dramatically change the size of Highstar's bite: in the past, AIG has committed “significant” bridge equity financing to allow Highstar to close large deals, Lee said. Now, Highstar will be able to finance a larger portion of deals directly out of the new fund.

One element of the firm's strategy may change. Whereas in the past the bulk of Highstar's investments have been in North America, Lee said the firm is now well-positioned to make more international deals, though with a heavy developed-market focus.