There are many interesting insights in our recently published Deep Dive on Blackstone‘s infrastructure programme. But if we had to choose one, we’d single out how the firm is helping reframe the debate on open-end funds away from the core and super-core brackets and towards the value-add, growth end of the spectrum.
Sean Klimczak, global head of Blackstone Infrastructure Partners, summarised what Blackstone is trying to do elegantly: “The power of our permanent capital model is that we can think about things like a strategic rather than a financial investor… that allows us to… really think about what a business could become in 10, 15, 20 years from now versus just what will it be over the next three-to-five years.”
That philosophy – combined with Blackstone’s opportunistic penchant for buying well and the very healthy 20 percent net returns BIP is currently generating – speaks to an approach that wouldn’t look out of place in a Global Infrastructure Partners or Brookfield Asset Management closed-end mega-fund.
In that sense, BIP feels different from KKR‘s recently launched Diversified Core Infrastructure Fund, or Brookfield’s Super Core Infrastructure Fund – two vehicles anchored in the core end of the market, including concessions and public-private partnerships.
Before this gets misunderstood, we’re not claiming Blackstone is pioneering the market for value-add, open-end funds. We’re well aware IFM Investors and JPMorgan Asset Management have been managing permanent capital vehicles for many years that don’t fit neatly into the core and super-core brackets now being occupied by KKR and Brookfield.
But it’s undeniable that recent open-end efforts – in particular if you also count long-dated vehicles like Macquarie‘s Super Core Infrastructure Fund – have tended towards a neat division of labour. One that sees managers’ closed-end flagships adopt a higher-returns, value-add or core-plus strategy, with the permanent capital offerings targeting assets with less growth potential and consequently lower returns.
BIP bucks that trend with its focus on investing in platforms it can grow over the decades.
Depending on the assets, there’s almost a growth equity flavour to Blackstone’s approach. That’s particularly evident in its investments in the digital infrastructure sector. Both data centre platform QTS Realty Trust and fibre-to-the-home builder Hotwire Communications are either founder-run or the founders retain a significant stake in the business.
That approach has given it a competitive edge, explained Paul Chapman, New Mexico State Investment Council’s director of real estate and real assets, one of BIP’s LPs. “You have entrepreneurs and families that have created these businesses that want to continue to have an ownership stake and are generally disinclined to speak to short-term capital. Blackstone’s permanent capital has been very important. This has happened in about half their deals.”
It’s a classic alignment of interests play, one highlighted in our April 2020 Deep Dive on long-term structures by Andreas Köttering, head of European infrastructure at CBRE Global Investors, manager of an open-end mid-market fund. “That [longer] time horizon provides alignment between the fund and the portfolio company, giving appropriate time for us to drive changes and growth within the lifecycle of a long-term management team,” he told us.
Last year, we concluded a similar weekly letter on long-dated structures by pointing out it’s for LPs to decide what role infrastructure should play in their portfolios. That truism holds. But when they think about open-end funds, LPs don’t necessarily need to associate them with low-growth, low-return products.
Blackstone’s entry into the asset class is a reminder there’s a more entrepreneurial market out there that is ripe for exploring with the right kind of permanent capital.