BlackRock’s swoop on First Reserve: How it happened

Jim Barry and Mark Florian, respective infra heads at the two US firms, tell Infrastructure Investor about the acquisition’s rationale and how it will help BlackRock move up the risk curve.

There is some method in the way the world’s largest asset manager goes about gaining heft into a new market.

“We pick some sectors and then build out capability. That’s what we’ve done in infrastructure, starting with renewables, infrastructure debt and Mexico; we have a fund of funds business as well,” Jim Barry, head of infrastructure at BlackRock, told Infrastructure Investor on Wednesday. “The next area was energy and power more generally. In particular, we wanted to move further up the risk curve from what we currently do in renewables.”

Barry was speaking on the day when his firm acquired the infrastructure unit of US energy buyout specialist First Reserve, a deal that will see the latter’s entire team migrate to its bigger cousin and BlackRock’s infrastructure assets under management jump to $14 billion from about $10 billion.

The transaction did not come out of the blue. It was announced a bit less than a year after both firms teamed up to pay $900 million for 45 percent of Los Ramones, two gas pipelines belonging to a subsidiary of Mexico’s Pemex.

“On this we were working shoulder to shoulder with them,” Mark Florian, head of infrastructure at First Reserve, told Infrastructure Investor. “In the way we were thinking about risk/return, underwriting… we saw a great alignment. So we had a dialogue about other investments we could do together and over time, it gravitated to them offering to acquire the business.”

Prior to the acquisition, BlackRock had largely focused on “highly contracted, post-development” renewables assets, “at the higher-quality end of OECD”, Barry explained, targeting net returns ranging between 6.5 and 9.5 percent. Last June, eager to broaden its horizons, the firm hired Pat Eilers and enlisted David O’Brien to build a North American equity strategy focused on conventional power and energy.

Joined by four or five other team members, they started off scouting the sector to deploy pools of capital held within BlackRock.

EYES ON GROWTH

Acquiring First Reserve was a way to speed up the build-up. “When the opportunity came up to acquire the business, we jumped at it. It was an opportunity to accelerate what we were planning to do and build scale in a much shorter time frame,” Barry says.

Eilers and O’Brien’s staff will now integrate with First Reserve’s infrastructure team, constituting an energy franchise that will be headed by Florian. The unit’s strategy will not change: what both Barry and Florian describe as a “value-add” approach will remain, with target returns in the mid-teens.

“For our team, it’s a great opportunity to expand,” Florian said. “BlackRock is a very successful asset manager with an extensive network of offices around the world.”

Following the transaction’s closing, expected by the end of Q2, the team will be busy deploying First Reserve’s $2.5 billion Fund II, which Florian said is about 55 percent invested.

First Reserve, his unit’s parent group, is a significant investor in both of its infrastructure funds; “that will be maintained”, Florian noted. He added that a successor vehicle could possibly be launched in 2018, and hinted that some of BlackRock’s existing separately managed accounts could invest alongside the co-mingled funds.

“BlackRock does have a lot of pools of capital. So it’s a possibility that those funds could help. In some situations, large equity cheques are needed, and we sometimes work closely with our investors to fill the part of the equity cheque that wouldn’t go into the fund.”

The bulk of the dealflow will come from the OECD markets, though Barry notes there is some scope to look at emerging markets, in particular Latin America, provided the firm can find “the right structure and assets”.

“Our ambition is to provide solutions to clients across the risk spectrum,” he concludes. “What we’re looking for are structural shifts creating addressable opportunities. State and industry balance sheets remain very constrained, yet in the power sector substantial amounts of capital will need to be invested.”