Make way, once again, for Blackstone

Can the US manager, its fundraising muscles flexed, establish itself in infra the way it has in other asset classes?

“Make way for Blackstone” was the original headline of our March 2010 story detailing the $200 million first close for the maiden incarnation of what is now Blackstone Infrastructure Partners.

What a difference nine years makes. As we reported last week, BIP ended its initial fundraising on a cool $14 billion. That was after a $5 billion first close last summer. The open-ended vehicle’s stated target? An eye-popping $40 billion, though the relaunched BIP benefited from the mother of all cornerstone commitments thanks to a $20 billion cheque from Saudi Arabia’s Public Investment Fund (BIP mark one, ultimately abandoned, was looking for a more modest $2 billion).

Founder Steve Schwarzman’s stated ambition to turn Blackstone’s new infrastructure business into a global leader will see the firm square off against the likes of Brookfield, with which it already spars in other asset classes, and Global Infrastructure Partners, the asset class’s de facto king.

And it’s here where Blackstone’s mega-fund starts to look different from the globetrotting flagships managed by Brookfield and GIP: firstly, because it’s open-ended; and secondly, because its path to world domination will come via a North America-focused vehicle (the continent will account for 70 percent or more of BIP’s investments, according to pension documents).

Intentionally or not, this North American focus recalls the origins of the PIF’s dollar-matching commitment, announced when Schwarzman travelled to Riyadh alongside US President Donald Trump in 2017. Blackstone, however, has made it clear on several occasions that BIP was never dependent on Trump’s now-dormant $1 trillion infrastructure programme.

To its credit, it is putting its money where its mouth is. In just six months, the firm has acquired a controlling interest in US midstream company Tallgrass Energy and a minority stake in Carrix, an operator of ports and rail yards. Both are understood to have amounted to a combined $2.5 billion equity cheque.

It remains the case that BIP could not, for example, acquire an asset like Gatwick Airport in the US (the sale of which, we learned this week, had turned CalPERS’ $155 million investment into $1.24 billion after nine years) simply because most US airports are in public ownership. But it is also true that, with the ability to deploy up to $2.5 billion in equity per deal, the fund would only need to average about three transactions annually to invest its $14 billion over the next two to three years.

Of course, BIP’s ability to invest large amounts of equity gives it a competitive edge. When your minimum equity investment is $1 billion-plus, you start operating in a more rarefied space.

Being a permanent-capital vehicle should also allow the team to go slow when needed. If BIP keeps sourcing deals without sell-side bankers – as it did with its first two transactions – the fund should stay on the right side of sellers eyeing it hungrily as a North America-focused piggybank.

Blackstone is not new to infrastructure per se, having already invested $7 billion in the sector. But that portfolio’s combined 39 percent IRR (as of 31 December 2017, according to public presentations) betrays a PE approach to these assets. That does not detract from the team’s experience. Sean Klimczak, who is leading the strategy, joined Blackstone in 2005 and has spent more than a decade working on the firm’s energy investments. It does mean, however, that some will consider BIP ground zero for Blackstone’s infrastructure efforts.

In that sense, the team’s performance will be scrutinised closely. It will also face the kinds of questions regarding alignment that surface each time a publicly listed corporation like Blackstone enters a new asset class, such as whether BIP is simply a branding exercise to boost its share price. From what we know, the team’s carry is entirely dependent on BIP’s success and is not firm-wide, so they certainly have skin in the game.

Ultimately, this is Blackstone we’re talking about, and its track record in private equity and real estate speaks for itself. Past performance might not be indicative of future results. But when you’ve got this kind of past performance, it would be disingenuous to downplay it.

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