The joys of independence

As the 40 employees of Alinda Capital Partners (Alinda) probably know all too well, the big corner office in their New York headquarters is often empty. The man in charge, Chris Beale, is on the road so much that things simply pile-up: a DVD labeled “Jamie Dimon on Charlie Rose” here, a textbook on pre-stressed concrete there, an unopened bag of coffee beans between the two.

But for the past two years, Beale has had good excuse to be out of the office. The managing partner of this infrastructure investment firm has been on the road meeting with portfolio companies and acquisition targets, as well as raising Alinda’s second fund: a process which kicked off in 2008 and took him on a dizzying tour around the world to meet with more than 100 institutional investors.

“Some would be one meeting, two meetings, six meetings. A lot of meetings,” he recalls. And a lot of time flying around the US, Canada, Europe, Asia and Australia to make it to said meetings.

In the end, it turned out to be time well-spent. In January this year, the firm closed its second fund on $4 billion, attracting nearly a quarter of the capital raised by infrastructure funds globally in 2009, according to data from placement agent Probitas Partners. Adding that to the $3 billion the firm raised for its first fund, Beale reasons that Alinda now stands second in the world only to Australian investment bank Macquarie in terms of capital raised from pension funds for the asset class. A ranking by pension consultant Watson Wyatt placed Alinda at number three in July 2009.

“Not bad for a firm that’s four and a half years old,” he says as he reflects on how it all happened.

Shooting for the moon

The origins of Alinda date back to 2002, when Beale first started planning the formation of a US-based fund to invest in infrastructure assets. From his perch atop investment bank Citi’s project finance group, he had been watching a market for private infrastructure investment develop in Europe, Australia and Canada. And when the Chicago Skyway deal happened in late 2004, it only confirmed his belief that it was only a matter of time before it would develop in the US as well.

In 2005, Beale and his four co-founders finally made their move. In August of that year, Beale, Citi colleagues Sanjay Khettry, John Laxmi and Simon Riggall and former Ahlstrom Capital chief Philip Dyk founded Alinda Capital Partners, naming the firm after the folkloric Alinda (“man in the moon”) of Aboriginal Australia – a play on Beale’s Australian roots.

“We had known each other and worked together closely for over 10 years at that point. And we deliberately started with five partners,” he says. Beale didn’t want Alinda to be perceived as just another middle-market buyout group (or “JAMMBOG”, as it’s known in the industry), where two people get together and hitch investors for a ride along their narrow area of expertise. By pitching an investment thesis on the shoulders of five partners with diverse experiences in various sectors of infrastructure, he hoped to avoid the fate of many JAMMBOGs in the US: small funds with no distinguishing features from their peers.

Beale certainly succeeded in avoiding peer competition. When Alinda rolled out its first offering document in 2005, “we were the only ones out there”, he recalls, not counting more private equity-style investors like Highstar Capital. There weren’t many investors in the US that knew anything about infrastructure. “It was a real missionary effort because there was only one institution in the US that had actually made an allocation to infrastructure and that was to a European infrastructure fund,” he says.

That investor was Baylor University of Waco, Texas.

Soon, Alinda was joined by Macquarie and Goldman Sachs, which hit the road a few months later for their initial infrastructure funds in the US. Ironically, that is when Alinda began to get some traction, he says. “Investors saw Goldman’s launch as validation that there was an infrastructure investment opportunity here”.

Yet before any investor had even expressed interest in a commitment, there was a big decision Alinda had to make. “We had an approach in November 2005 from one of the large private equity firms to join them. They would raise the capital for us and we would be their infrastructure team”, he says.

The firm is believed to have been The Carlyle Group. Beale declined to comment on this, as did Carlyle.

Nevertheless, the offer was tempting because the connections and investor relationships of a big private equity firm could certainly help speed along the fundraising process: “A rational group of people would have thought, well, that’s the home run, you know, joining a major firm, being their infrastructure arm”.

“But the five of us had a meeting . . . and within about a minute and a half we all said, ‘We’re going to do this independently, or die trying’”. Why? “The adrenaline was flowing, we were confident in our investment skills, and we definitely had the entrepreneurial bug”.

‘This is all we do’

In retrospect, he views independence as the key factor that enabled the firm to prosper and grow. One can understand why. In the wake of the financial crisis, questions of alignment of interest have become more important than ever, as many investors in funds affiliated with large financial institutions were left with investment losses while bills piled up for all kinds of fees: asset acquisitions and disposals, management and various others.

This has proved a boon for independent infrastructure investors like Alinda, which can say with confidence – as Beale does – “this is all we do”. It means the firm doesn’t have other clients that it shows deals to in an effort to maximise fees. Nor, he says, do investors have to work through the thorny question of “which fund does a utility deal go in?” – the kind of issue bigger private equity firms might face if infrastructure is just one of many pockets they invest out of.

Most importantly: “We’ve got a substantial part of our net worth in this business”. Joking that it’s a “state secret”, he declines to say how much. But it’s fair to say that it’s enough that if he makes bad investment choices, he’ll feel the pain.

Package all this up and what you’ve got is alignment of interest in Chris Beale’s book – regardless of the fee structure, which he admits is the much-maligned private equity-style combination of management fee plus carry.

The secret sauce

But pension documents and interviews with the firm’s limited partners show that there is more to Alinda’s appeal than just independence.

The firm provides limited partners flexibility around how long they can invest in its fund. As detailed in the minutes of the New Mexico Educational Retirement Board, which committed $50 million to Alinda in 2008: “[Alinda] Fund II has a lifespan with two options: either invest for 10 years, or elect at a certain point to participate in the Fund for 20 years.”

Asked about this innovative fund structure, Beale looks contemplatively at the minutes and, after pondering for a few minutes, declines to comment, saying: “I don’t think that was the secret sauce. I really think it’s the independence and our experience in the asset class”.

Fadi Bousamra, chief investment officer of the $1.8 billion pension system for the Metropolitan Government of Nashville and Davidson County in Tennessee, a limited partner in Alinda’s second fund, agrees.

“The secret sauce was that they had enough money to act when the market was down. But how did they get that money? It was because of the team they had built,” he says.

Between Beale, Dyk, Khettry, Laxmi and Riggall, there are some indeed some eye-catching statistics. The five founders have spent over 20 years each in infrastructure, from project finance and investment banking to advisory services and equity investing. They’ve structured over 500 infrastructure transactions, says Beale, and have done infrastructure business in 75 countries.

These kinds of figures caught the eye of Frederic Gilden, comptroller of the city of Norwalk, Connecticut – more so than all the talk of independence. When the $315 million Norwalk Employees Pension System agreed to commit $10 million to Alinda’s first fund in February 2007, independence “wasn’t one of the factors” foremost on the investment committee’s mind. “We liked their experience”.

But that was not all. “A number of people [on the investment committee] really liked the 20-year option,” he says.

Likewise, at the Metropolitan Government of Nashville and Davidson County, flexibility around the investment period was a nice option to have on the table, says Bousamra. But it didn’t seal the deal.

Initially, the county government committed $25 million to Alinda in 2008. “The bottom fell out of the market when we made that commitment,” he recalls, “and we saw what they were buying and I was impressed at the discipline they were maintaining so we came back and we increased our investment.”

The pension gave Alinda another $15 million after the firm acquired in March 2009 a 50 percent stake in a 330-mile natural gas pipeline in Louisiana from a publicly listed master limited partnership. The $526.5 million cash commitment to the project was financed out of the firm’s second fund, in which there are about 15 state and local pension investors like Nashville and Norwalk.

But there is another, more practical reason why Bousamra likes Alinda’s second fund so much: “I know some of the assets that are in there, and right now they have about a 13.4 percent cash-on-cash return without leverage,” he says, referring to the pipeline deal.

High standards

That’s not an easy return to deliver. But Alinda’s set high standards for itself on a number of fronts. According to the New Mexico pension minutes, the firm expects a 6 percent to 8 percent current yield and hopes that by years three and four, the fund will be averaging 10 percent. The firm’s first fund had already reached a 10 percent annual yield at the time Khettry and Dyk spoke to the pension, according to the minutes.

Beale didn’t want to delve into much detail. But he says he’s satisfied with the fund one portfolio. “It’s performed well, with the individual companies surviving the very severe recession, and we’ve had no financing issues because every investment was structured with long-term financing. We weren’t stuck in the midst of the financial crisis with bridge loans to roll over.”

Alinda invested its first fund in 24 separate infrastructure assets across seven portfolio company strategies: airports, rail, roads, gas utilities, water and wastewater, among others.

All but one company – South Staffordshire Water, a water utility in the UK’s Midlands – were bought through bilateral negotiations with sellers. Perhaps not surprisingly, then, all the fund one assets were sourced from the private sector, as opposed to government auctions of assets that often grab the headlines.

On the Roads

But another common thread in the portfolio has understandably raised some eyebrows:  all but two of the assets in fund one were purchased pre-crisis, during 2006, 2007 and 2008, when the markets were arguably at their frothiest. This has fueled speculation among some of Beale’s competitors that the firm participated in the bubble by paying too much for its acquisitions.

Critics especially like to point to American Roads, Alinda’s first investment and the toll road strategy for fund one. The company owns four separate toll road bridges in Alabama as well as a lease on the Detroit-Windsor Tunnel, a busy toll link between Ontario, Canada and Michigan in the US.

American Roads was previously known as Macquarie Small Cap Roads: Macquarie rolled-up the five roads and held them on its books at a A$195 million carrying value, according to an old annual report, in the hope of placing them into one of its funds. But the roads were too small to fit the strategy of the Macquarie Infrastructure Group, which was at the time Macquarie’s flagship toll road investment vehicle. “So they sold them to us to get them off their balance sheet,” Beale recalls. The transaction closed in late 2006.

In retrospect, that proved to be a very profitable year for Macquarie and one can find mention of the deal in headlines such as – “Macquarie Bank takes over the world, profits handsomely” – in the Australian press several months later. Hence the speculation whether the price, never publicly disclosed, was really worth it.

“We’re happy with the price we paid for every asset,” Beale says, adding that the firm stayed disciplined and “avoided the very high prices paid during the bubble” thanks in part to staying away from over-priced sectors such as ports while seemingly everyone else was buying.

“It’s all about the price you pay. I’ve heard some people say that with a 99-year concession it doesn’t really matter because you’re going to make it up over time. I think that’s wrong. I think you never make it up if you pay too much.”

Staying in the middle

Judging by the traffic into Alinda’s $4 billion fund two, it seems that investors are happy enough with Beale’s pricing. More than 70 percent of fund one investors invested in fund two. And this was at a time when a lot of investors were sitting out the recession and not making commitments to any types of alternative investments whatsoever. So one can understand if Beale wishes to keep doing what he’s been doing up till now.

“Ending up with four [billion dollars] means that we’ll continue to do the exact same sort of business we did in fund one,” he says. That means buying up assets in the same three sweet-spots the firm favours – regulated utilities, transportation, and long-term contracted services – and doing so in the $200 million to $600 million range of commitments Alinda has inked in the past.

He admits he could have done the same with slightly less: “We would have been delighted to be at $3 billion in fund two.” But not too much less. “We would have been disappointed to end up at a billion because, to continue doing the same deals, we’d need to have equity syndication on many of them.”

All of which indicates that, as the firm has raised capital, it’s also raised its ambitions. “With our first fund we targeted a billion . . . and we judged that to be necessary to get to a certain critical mass,” he says. They got more than they bargained for: in June 2007, the first fund closed on $3 billion.

“But the difference in what we were able to execute then was extraordinary.” Why? “Having the extra firepower of a three billion dollar fund meant we could win control of 100 percent of most of our assets” and successfully execute around the strategy of investing in the mid-market.

Successful fundraising didn’t just aid Alinda’s growth. It transformed it into the firm it is today – the mid-market infrastructure specialist able to deliver the deals it wants, when it wants them.

Alinda Capital Partners at a glance

Assets under management: $7bn
Funds: Alinda Infrastructure Fund I, L.P. (2006) $3bn; Alinda Infrastructure Fund II, L.P. (2008) $4bn  
Employees: 40
Offices: New York, London
Geographic focus: North America, Europe
Infrastructure focus: Transport, utilities and contracted assets
Founding partners: Chris Beale (managing partner), Phillip Dyk, Sanjay Khettry, John Laxmi, Simon Riggall
Most employees came from: Citigroup, Morgan Stanley
Most common graduate school attended: Harvard Business School
Quirks: Alinda’s offices house an infrastructure art collection