Spend a decent amount of time talking to Blackstone’s senior leadership and you come away with a new appreciation for the storied New-York manager’s game plan for the asset class. Blackstone being Blackstone, there was never any doubt it would one day create a dedicated infrastructure programme.

That it chose to not just slap the Blackstone label on another identikit, 12-year, closed-end mega-fund when it finally entered the fray is to its credit.

So what exactly is Blackstone trying to do in infrastructure? Here’s an attempt at condensing it: the firm wants to use permanent capital to invest at scale, and build thematic platforms that can be developed over decades to become industry leaders in the sectors they operate in. It also has a focus on buying well that can veer into opportunistic.

Sean Klimczak“You only pay the premium for a platform once, and you then get to act like a strategic thereafter”

Sean Klimczak

“The power of our permanent capital model is that we can think about things like a strategic rather than a financial investor,” says Blackstone Infrastructure Partners’ global head Sean Klimczak. “What that allows us to do is to stick with high-conviction themes and 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’s just a very different mindset and a very different lens. You only pay the premium for a platform once, and you then get to act like a strategic thereafter.”

When Blackstone burst on to the infrastructure scene in May 2017 with its second attempt to break into the asset class, this permanent capital vision was not exactly the headline grabber.

What caught everyone’s attention was the $20 billion-matching cornerstone commitment it received from Saudi Arabia’s sovereign wealth fund PIF – clinched off the back of a well-publicised trip to Riyadh by founder Steve Schwarzman and other business leaders alongside then US President Donald Trump – and a goal to raise $40 billion. The latter, when achieved, will make Blackstone Infrastructure Partners one of the world’s biggest infrastructure funds. In fact, when it finished raising its initial $14 billion in 2019 – half of which came from PIF – BIP instantly became the largest first-time infrastructure fund ever raised.

Second time’s the charm

“There had been discussions at the highest level [with PIF] going back to 2016,” recalls Blackstone president Jon Gray. “They wanted to invest in infrastructure because of the asset class’s sticky nature, its inflation protection and yield. The thinking, which they agreed with, was to do things at scale, and fit that with their desire to invest in the US – historically, infrastructure investing had always focused on Australia, Europe and Canada.”

“The US has underinvested in its ageing infrastructure for many decades,” Klimczak adds. “PIF has shared our common vision for addressing this significant shortfall and has been a leader and major contributor to our efforts to invest behind innovative US infrastructure companies and projects.”

“So, because of our history, the relationship, the nature of the asset class and the push to do more in infrastructure, it all came together,” says Gray. “And it created something very special, definitely starting the business with more momentum than when you typically start a new strategy.”

“If you asked me what would I like to do more of, I would like to do more ‘green’ investment”

Jon Gray

This unique structure also created some obvious questions for the fund’s other investors. But LPs we spoke to at launch time and today said their concerns were allayed once it became clear PIF sat on the fund as a regular LP, with no extra influence on investments.

Fast forward to late July 2021 and BIP has invested more than 70 percent of the $14 billion raised – generating a net return of 20 percent and a 1.4x multiple on invested capital, according to Q2 earnings materials. Gray told analysts on a Q2 earnings call that a new round of fundraising would begin “in the next few months”.

“We set out to invest in scale, mission-critical infrastructure platforms,” says Klimczak. “We’ve now invested in eight such platforms, building a US-weighted portfolio. The sectors and companies in which we’ve invested are exactly what we hoped to have done at this stage of the programme.”

Gray echoes that sentiment: “I think we did exactly what we set out to do. We built a diversified portfolio, got a tonne of momentum. And the long-duration structure has been a competitive advantage.”

Forged in the pandemic

‘Momentum’ is an apt word because, looking at a timeline of BIP’s acquisitions, an obvious fact jumps out: six of BIP’s eight assets were acquired during the pandemic, with four – including high-profile acquisitions of Signature Aviation and toll road operator Autostrade per l’Italia (ASPI) – clinched this year. Indeed, one LP says that before the recent spate of deals, it was wary that deal-making was progressing slowly, though not for a lack of trying.

Carolyn Hansard, senior director of energy, natural resources and infrastructure at the Teachers’ Retirement System of Texas, another of BIP’s LPs, was more understanding. “They’re looking at investing in marquee assets with long gestation periods and it takes some time,” she says. “I think covid escalated [dealflow] in some cases and in others slowed it down.”

There is no doubt BIP was able to quickly shift up a gear to make the most of the opportunities created by the pandemic. ASPI – a €9.3 billion deal pursued alongside Macquarie and Italian state investor CDP Equity – is a prime example.

“Covid has provided a dislocation and a disruption to the [transportation] sector, offering discounts to where [these assets] would have traded had covid not occurred”

Jon Kelly

“When I was meeting with the team in late 2019, I would have thought it would be very difficult for us to buy transportation assets in Europe for the value that we’re trying to achieve,” admits Jon Kelly, whose arrival from Brookfield as Blackstone’s European head of infrastructure was announced in February 2020. “Covid has provided a dislocation and a disruption to the sector, offering discounts to where [these assets] would have traded had covid not occurred.”

For ASPI’s previous owner, Atlantia, covid brought an additional layer of complexity to the fate of an asset that had been in doubt since 2018, when the collapse of Genoa’s Morandi Bridge killed 43 people. What followed was an Italian government intent on stripping ASPI of its assets, yet never really having the political capital or legal standing to do so.

So although we are talking about Europe’s largest toll road portfolio, which hosts more than four million Italians every day, it is fair to ask: was ASPI a distressed, rather than a discounted, asset?

“It’s an asset that’s going through a period of transition,” responds Kelly. “There’s been a migration in the regulation to where reinvestment into the asset is remunerated much like a US utility. You’re remunerated for prudently spending capital. Our job with our partners is to be good stewards of the asset and to see it through this transition. We’ve fully underwritten the required investments that we think are necessary. We have great alignment with the regulator and with the state. We felt it was one of those very unique circumstances to invest behind a tremendous asset.”

That uniqueness extended to the due diligence. Blackstone brought in Mike Adams, head of strategic projects for engineering group Bechtel, to analyse the complexity of the improvements the network required. However, Kelly says that following the 2018 tragedy, the Italian government and ASPI conducted site visits and inspections that took more than two years, and which provided levels of due diligence Kelly says a financial investor “would have trouble being able to do [to] that level of depth”.

Signature Aviation, which BIP first approached in February 2020 before buying it a year later with Global Infrastructure Partners and Bill Gates’ Cascade Investment Group, is another example of Blackstone’s eye for a good deal. As Klimczak explains, Signature is exactly the kind of thematic transportation asset that would always be in the business’s sights. “You’ve got very positive, long-term, GDP-plus style demand trends for private aviation,” he says. But once the pandemic started, “we saw an opportunity to invest in the largest airport network in North America at a valuation that was at a meaningful discount to where precedent transactions had happened, largely in Europe, around major airport networks. When we made our offer for Signature in December 2020, we didn’t have a vaccine and it wasn’t perhaps as obvious as it is today that people would return to travelling. But we had high conviction that they would.”

Signature also illustrates the kind of scale Blackstone can bring to the table. Alongside data centre platform QTS Realty Trust, Signature is the second deal where BIP joined forces with another long-life Blackstone private capital fund, in this case Blackstone Core Private Equity (for QTS Realty, it was Blackstone Real Estate Income Trust).

Are there concerns investors might view this mixing and matching of permanent capital streams as an example of strategy dilution, though?

“Signature is a perfect example of a transaction that happened because we could draw upon the collective firepower of Blackstone, beyond just our infrastructure business,” Klimczak says. “As Steve Schwarzman often says, ‘there are no patents in finance, but scale is a real differentiator’. I’m a firm believer that the combined firepower of this organisation is a real advantage for us and our investors.”

‘Green premium’

Given its status as one of the 21st century’s investment megatrends, renewable energy is one sector where BIP’s portfolio feels surprisingly light.

“If you asked me what would I like to do more of, I would like to do more ‘green’ investment,” Gray admits. “I think the biggest challenge is deploying capital in the green space because there is so much investor capital.”

Klimczak agrees: “I think there is a meaningful ‘green premium’ today. And when it comes to renewables, I would say it’s not a question of ‘if’, it’s just a question of ‘when’ we’ll find the right partner.”

In the meantime, Blackstone is riding the tailwinds of the clean energy revolution. Service station operator Applegreen, a European asset that Blackstone is also expanding into the US, is a case in point. As roads slowly fill up with electric vehicles, Blackstone is investing in the growth of charging infrastructure, banking on longer dwell times at Applegreen facilities as people charge up as “a really unique opportunity to potentially upgrade retail”, Kelly says. “As dwell times get longer at the sites, we would anticipate that would mean that people will spend more at the motorway service area.”

Greg Blank“If you look at what we’ve done, QTS is the biggest data centre take-private. Hotwire would be the largest pure-play fibre-to-the-home builder. On both of those transactions, our permanent capital was a real calling card”

Greg Blank

Nevertheless, it is legitimate to wonder whether Blackstone’s penchant for buying well and its obvious focus on returns are not holding the fund back. Although Blackstone is no doubt proud of BIP’s performance, the net 20 percent IRR it is currently generating is double the net 10 percent it told investors it was targeting, according to public pension documents – and comfortably above the 6 percent hurdle rate that triggers the fund’s 12.5 percent carry (Blackstone declined to comment on BIP’s performance, target returns and fee structure).

Which is another way of saying that, while returns compression in the renewables sector is real, BIP could probably afford a lower-returning platform in its portfolio. Either way, it does not look like we will have to wait long to find out. “I’m highly confident that over the next 12 to 18 months you’ll see us take steps to become a meaningful investor in the sector,” Klimczak says.

Plugging in perpetually

Although renewables may be absent for now, Blackstone is certainly finding happiness in digital infrastructure, the other hot sector in the asset class.

The firm’s digital infrastructure division is led by Greg Blank. Just as Klimczak has been at Blackstone since 2005, in its energy division, Blank has been with the group since 2009, working in its technology, media and telecommunications unit, before helping form the infrastructure team with Klimczak.

Yet while in his previous position Blank analysed similar opportunities and trends to his current role, he believes the key themes of data proliferation and consumer connectivity lend themselves better to an infrastructure strategy. “A dedicated infrastructure business has provided us with the right duration and cost of capital for digital infrastructure investments,” he says.

Blackstone’s challenge, then, is to find platform-building opportunities in a saturated sector that provide sufficient scale for a $40 billion fund. That explains why, according to Blank, Blackstone looked at about 100 assets before investing $4 billion into the QTS Realty platform in June, as data centres are BIP’s “highest priority focus”.

“The massive megatrends of data consumption and storage are driven by cloud migration and data proliferation,” Blank says. “[QTS] focuses on the highest growth in [the] stickiest customers within those segments.”

The QTS deal was preceded by the acquisition in April of Hotwire Communications, which Blank calls a unique business. “It’s fibre to people’s homes, but it focuses on high-rise buildings and homeowners’ associations in the south, predominantly Florida and the Carolinas,” he explains. “Even though they put fibre into somebody’s home, they contract with the homeowners’ associations. They have long-term contracts with effectively 100 percent penetration with no churn.

“If you look at what we’ve done, QTS is the biggest data centre take-private. Hotwire would be the largest pure-play fibre-to-the-home builder. On both of those transactions, our permanent capital was a real calling card and the reason why we were the preferred partner for those investments.”

This has been recognised by some of the fund’s LPs, such as the New Mexico State Investment Council, which committed $100 million to the vehicle.

“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 that may want to come in, make a bunch of changes and put it on the block in three-to-five years,” says Paul Chapman, NMSIC’s director of real estate and real assets. “Blackstone’s permanent capital has been very important. This has happened in about half their deals.” QTS is a founder-run business and Hotwire founders Kristin Johnson and Michael Karp retain a “meaningful equity” stake in the company, according to Blank.

“We’re not people who secretly want to be CEOs,” Klimczak says. “We fundamentally want to back great management teams and ensure they have all the resources they need to be successful.”

Road to $100 billion

Although a second round of fundraising is on the cards for BIP in the coming months, what is Blackstone envisaging for its infrastructure programme further down the line? Gray sees two areas of growth: infrastructure debt and geographic expansion.

“I think infrastructure credit will come up, but I think we’ll probably do it in the context of our insurance activities, because the duration is so well matched to the liabilities of insurance,” he says. “I think a second area of focus over time could be more geographic. We’re focused on the US now, but over time I think there’s an opportunity to do things more regionally. And that would obviously be Europe and Asia because those are both very large infrastructure markets.”

“We see significant opportunity in Europe, where trends are at different points in their lifecycle, and where our strategy allows us to be opportunistic and capture opportunities that might not be present here in North America,” Klimczak says.

Much like it took its time to enter the asset class, Blackstone does not look as though it will rush to expand just for the sake of it. “If you ask me specifically on infrastructure, do I think, over time, this could be a $100 billion business for us? Yes, I think it could be, because the asset class is so large and we’re still in the early days of it,” Gray says. “But it’s not going to happen overnight for us – it never does.”

Foiled by the GFC

Even with a stated desire to do things in its own time, you might be thinking 2017 was leaving it quite late to enter the asset class, for a firm of Blackstone’s stature.

As it turns out, that was not Blackstone’s first attempt. That would have been prior to the global financial crisis, when it hired two Australian investors from Macquarie – Trent Vichie and Michael Dorrell, who went on to found Stonepeak Infrastructure Partners – to raise its first infrastructure vehicle. The idea, as the Stonepeak founders told us in a 2018 interview (Vichie has since left Stonepeak), was to build an infrastructure programme at a large, well-known firm, beginning with a $2 billion fundraising. But soon after starting, reality hit in the form of the GFC. “The first week we were there was the week AIG went under. We went right into the crisis,” Vichie recalled. “We met every LP we wanted to meet,” Dorrell said. “It was just a woeful time to be doing it.” As Vichie put it: “People were literally hiding under their desks.”

After 18 months of fundraising and not much to show for it, Blackstone decided to close the programme, and Dorrell and Vichie agreed to part ways. And the rest, as they say, is history.