Do we live together or apart?

In our fundraising special starting on page 24 of this issue, you will find some interesting observations on the relationship between infrastructure and leveraged buyout investing. To paraphrase the words of Alain Rauscher, chief executive of Paris-based fund manager Antin Infrastructure Partners, he believes that – going forward – leveraged buyout returns will be similar to infrastructure returns. Indeed, given its ability to deliver cash yield from day one, infrastructure may even emerge the victor in this head-to-head comparison.     

As Rauscher sees it, the dynamics that delivered outsized LBO returns during the boom (in particular vast quantities of cheap leverage – my words, not his) are no longer available. Investors may continue to live in a fantasy world and cling to the hope that LBO funds can still somehow find a way of achieving 25 percent-plus returns. These investors are perhaps sold on the idea that operational wizardry really can compensate fully for the sudden impotence of financial engineering techniques. Or they may choose to join the real world. If the latter, they should be evaluating precisely how the Crisis impacted existing assumptions about different investment strategies and their risk-return profiles.

One outcome of this may simply be a greater inclination, in relative terms, to invest in infrastructure funds rather than leveraged buyout funds. There is, after all, the yield issue referred to earlier as well as the sense that infrastructure assets are intrinsically a safer bet than some of the racier assets LBO funds may be prepared to invest in. In a booming market, LBO funds will generally outperform infrastructure funds. In a depressed market, median performance may be similar – at which point, infrastructure’s more consistent return profile may win out over leveraged buyouts’ more volatile profile.

There are also some interesting nuances, largely because there is already an overlap between the two asset classes. There are numerous examples of large private equity funds, such as Blackstone Group and Kohlberg Kravis Roberts, having invested in infrastructure-related assets. One of the most prominent recent examples, discussed elsewhere in this issue, was CVC’s €1.7 billion acquisition of a 16 percent stake in Spanish construction firm ACS as a way into the capital structure of Spanish developer Abertis.

One outcome of GPs’ apparent enthusiasm for infrastructure – as well as LPs – could in theory be more of them seeking to launch infrastructure platforms. Interestingly, however, all three of the firms mentioned in the previous paragraph have been in the market raising debut infrastructure funds for some time and appear to have found the crisis/post-crisis fundraising environment a tough one to conquer – none have yet reached final close after two to three years of knocking on doors. This may dissuade others from following in their footsteps.

More likely perhaps is that, weighed down by capital raised in the good times and hard to invest in tougher times, LBO firms will look to deploy a greater proportion of their capital in infrastructure. They will look at transactions like ACS/CVC and feel that here is a space in which they can put significant amounts of capital to work (let’s not forget the eventual €1.7 billion stake sale, while sizeable, was not a patch on the €12 billion buyout of Abertis originally under negotiation). And when it comes to return expectations, for the reasons outlined above, a little pragmatism may be necessary on both sides of the GP/LP relationship.

It’s also a sector

Such a development would be a reminder that, for all infrastructure’s potential as an asset class in its own right, it is also a very important subset of the private equity world. It is a sector as well as an asset class. This is worth bearing mind when pondering infrastructure fundraising totals that focus only on infrastructure-focused funds. They don’t tell the story of the total amount of capital being targeted at the infrastructure space.

Nowhere is the relationship between private equity and infrastructure more fluid than in emerging markets. In somewhere like India, infrastructure is not entirely synonymous with private equity but is nonetheless where private equity firms are these days investing most of their capital.

If developed world LBO fund managers do indeed start shovelling more of their capital into infrastructure, an interesting symbiosis could emerge. On the one hand: emerging markets private equity investment in greenfield infrastructure, where private equity returns are hoped for. On the other: developed markets private equity investment in brownfield infrastructure where infrastructure returns are accepted.