Blackstone: Return hurdle ‘too low’ for private infrastructure

Returns observed in the listed infrastructure sector suggest that the return hurdle may have been set too low for many private infrastructure funds, according to the founding partners of Blackstone Infrastructure Partners.

In a guest editorial for Infrastructure Investor magazine, Blackstone’s Michael Dorrell, David Tolley and Trent Vichie point out that the Dow Jones Utilities Index could be used as a benchmark of performance for long-term, US-listed infrastructure returns. That index has delivered 9.5 percent compounded returns per year since 1970, and private infrastructure funds should take stock of this return:

“By simply levering the Index to customary infrastructure fund leverage levels, one would increase the return to 12 percent. That is, on a leverage-equivalent basis, private market funds must provide net returns of 12 percent simply to match the historical performance of the Dow Jones Utilities Index,” Dorrell, Vichie and Tolley write in their editorial.

To provide a 12 percent net return, Dorrell, Vichie and Tolley point out that funds will likely need to provide internal rates of return in the range of mid-teens, taking into account several different fee structures.

Source: The Blackstone Group

“The analysis demonstrates clearly that a low double-digit return hurdle, which is somewhat common among private infrastructure funds, is too low to generate any meaningful outperformance against publicly-listed infrastructure, and provides investors no compensation for illiquidity,” they conclude.

The observation is one of five key points Dorrell, Vichie and Tolley make in their guest editorial, “Value investing in infrastructure”, which appears in the July-August edition of Infrastructure Investor magazine. To view the full guest editorial, click here.