Striking a new path

The launch of a dedicated infrastructure division within The Blackstone Group in 2008 quickly became one of the major stories in the young field of US private infrastructure finance. The private equity firm’s infrastructure team was to be led by former Macquarie Group executives Michael Dorrell and Trent Vichie, and the division attracted attention as a potential new model for infrastructure investing.

Both Dorrell and Vichie started their careers with Macquarie in Australia, transferring to New York in 2000 to start up the investment bank’s North American infrastructure business, and have focused their attention on investments in the US and Canada since then.

Now, nearly three years later, news of the Blackstone infrastructure team’s spin-out has unsurprisingly attracted attention as well. Dorrell and Vichie’s new firm, Stonepeak Infrastructure Partners, opened new offices on New York’s Fifth Avenue in May. 

Sat before me, Dorrell and Vichie are poised to discuss some of the changes occurring over the last 10 years in the US market, as well as the challenges of launching a new division in the depths of the 2008 crisis.

Investment focus

Stonepeak’s investment focus is on middle-market North American infrastructure companies, including family-owned businesses. It’s an area that Dorrell describes as a “rich and fertile territory”.

Since the early days of building out Macquarie’s North American business, Dorrell and Vichie have had a good vantage point from which to study changes in US attitudes toward private investment in infrastructure. 

Vichie says there is now a “broader dialogue” about the use of private capital to fund US infrastructure projects than there was when he arrived on the scene a decade ago. He says he foresees a “fundamental squeeze” occurring in the US due to the fiscal crises that state and local governments face, and the fact that gas taxes, which provides the bulk of highway funding, are not indexed to inflation.

“I think you will see the market get pushed in the direction of having greater private sector involvement, but like any big change in the way government acts, it usually takes a crisis,” Vichie says. “There will be more transactions but I don’t know if that will be in a year or 10 years.”

But for now, Vichie and Dorrell say they are avoiding government privatisation processes and are not focusing on big-ticket auctions. They are looking instead at what they perceive to be a distinctive strength of the US market: a wealth of middle-market infrastructure companies that could otherwise be overlooked by Wall Street firms.

Stonepeak will target investments involving equity commitments of between $50 million to $200 million, Vichie says. Dorrell and Vichie argue that the US offers a particularly wide scope for mid-market investments, with many more medium-sized or family-owned businesses than they would find in Europe or Australia.

“We are trying to take medium-sized infrastructure businesses, fund them, and grow them into larger infrastructure businesses,” Dorrell says.  “We want to eventually sell them when the equity value has grown to a size where they attract some of the larger, lower-cost capital pools, or else our LPs can hold onto them longer term if they prefer.”

“We plan to avoid buying into the larger, more competitive end of the market,” he says.

Dorrell describes the US as a unique and entrepreneurial environment with hundreds of infrastructure businesses fitting Stonepeak’s target size.

“You don’t see that as much in Australia or in Europe. For whatever reason, those markets are much more institutionalised and less fragmented,” Dorrell adds.

Vichie says the large size of many infrastructure funds can limit them to equity investments of $300 million to $500 million or more, bringing them into competition with pension funds, master limited partnerships, sovereign wealth funds, utilities and other investors. But for investments in smaller companies, Vichie and Dorrell say that they are facing less competition.

“We’ve found that our main competitors for these medium-sized infrastructure businesses are middle-market private equity firms. So we rarely see ourselves coming up against infrastructure funds,” Dorrell says. He adds that, in his view, an infrastructure firm is a more natural investor in the space than the typical buyout firm because “infrastructure assets do not hit private equity returns” and longer hold periods are required.

“No regulator wants to see their key infrastructure assets bought and sold in a short-term private equity flip”, he says.

Vichie and Dorrell decline to specify sectors that they are currently looking at, but mention that power, water, renewables and energy tend to create the most deals. Each of these industries is fragmented and many are undergoing “seismic shifts”, says Vichie, which he says are factors that drive the most interesting deal flow.

At the time of this interview the firm has not yet officially gone live, so it’s a little premature to talk about Stonepeak’s investments. In their time at Blackstone, Dorrell and Vichie invested in Crosstex, a Dallas, Texas-based midstream natural gas company that operates over 3,300 miles of pipeline, but that investment remains in the portfolio of a Blackstone fund. Dorrell and Vichie also initiated an investment in a desalination plant in California’s San Diego County, and that investment is now part Stonepeak’s portfolio.

The crisis

Dorrell and Vichie left Macquarie in May 2008, and joined Blackstone the following October. In those four months, some of the major events of the financial crisis occurred, including the collapse of Lehman Brothers in September, the takeover of Merrill Lynch by Bank of America, the impending avalanche of insurer AIG, and the eventual engineering of the federal government’s bailout of major US banks and financial institutions.

As equity markets fell 40 percent within the first month of their new role at Blackstone, Vichie reflects: “We were thinking to ourselves, ok this is going to be interesting”.

That period was frustrating, Vichie and Dorrell say, because they saw so many good investment opportunities that they were not able to pursue because of the dismal fundraising climate.

“It was an amazing time to be an investor,” Dorrell says. “The deals we were seeing were incredible but we didn’t have any money. Very few people had any money at that time, and those that did and were brave enough to spend it, got some pretty exciting deals done.”

Dorrell and Vichie decline to comment on fundraising for Stonepeak. Blackstone’s infrastructure division had been expected to raise up to $3 billion, and was widely reported to have collected $450 million earlier this year. 

Despite the advantages of establishing an independent firm, Dorrell and Vichie remain optimistic about private equity firms’ ability to create a foothold in infrastructure. “Blackstone raised capital, just not the $3 billion we all expected back in 2008, KKR has raised capital, CVC has raised capital,” they say. “But clearly LPs are trending towards independent platforms, which is why Blackstone and ourselves decided that Stonepeak would be the best outcome for our [limited partners].”