Making the case for private capital

THE PLAZA, ONE of New York’s most famous hotels bordering the even more famous Central Park, has, according to its website, “emerged from a recent $450 million transformation to reflect a new and contemporary spirit”. This outlay of capital on a physical asset is in keeping with the times, and makes the Plaza an appropriate location for a discussion of topical themes with five of the US’ leading infrastructure investment and advisory professionals: Rob Collins (Greenhill & Co); Andrew Fraiser (Allen & Overy); Marc Lipschultz (Kohlberg Kravis Roberts); Alec Montgomery (Industry Funds Management); and Peter Taylor (Hastings Funds Management).

As the roundtable attendees gather on this early October morning, the prospect of spending money on physical assets forms a signifi cant backdrop to the conversation.

The fast-tracking of selected infrastructure projects and the proposal to create a national infrastructure bank to try and free up around $200 billion of private capital spending are key aspects of President Obama’s $447 billion jobs stimulus package announced in September.

Scepticism about the plans isn’t hard to find. Sometime after the roundtable had taken place, John Mica, the Republican chairman of the Transportation and Infrastructure Committee in the House of Representatives, issued a statement querying why only 14 infrastructure projects – including New York’s new $5.2 billion Tappan Zee Bridge – were being fast-tracked. “While the Administration is pushing these projects forward with current red tape and rules, they just push further back or stall hundreds of other projects pending federal approval,” Mica sniped.

Around the table, questions are also asked about the likely effectiveness of such measures and whether the best intentions in the world will do anything other than scratch the surface of a US infrastructure pending requirement assessed two years ago by the American Society of Civil Engineers to be around $440 billion per year. “How much actual investment will there be?” ponders Montgomery, head of infrastructure for North America at fund manager Industry Funds Management. “Will it change the long-term philosophy of investment in infrastructure?”

That’s a big question. For now, there is at least the consolation that infrastructure is a word on everybody’s lips. “It’s terrific that infrastructure is high on the agenda,” says Lipschultz, a New York-based partner at global investment firm Kohlberg Kravis Roberts (KKR) and head of the firm’s energy and infrastructure business. “It’s demanding attention and that’s good because it’s necessary that people recognise the importance of infrastructure in terms of the products and services they need and the way that infrastructure enables the economy to function.”


What’s also necessary, at least as far as those around the table is concerned, is that the role of private capital in building out America’s infrastructure is fully understood and appreciated.

Collins, managing director at independent investment bank Greenhill & Co, hails Illinois Republican Senator Mark Kirk as someone who “talks about the balance between public and private [sources of capital]. We need more elected leaders like that, saying that the private sector is needed to solve infrastructure problems”.

So far, it appears too few politicians are making a loud enough noise to upset the status quo – and the status quo in the US is a deep suspicion of private sector involvement in infrastructure. “It’s fascinating that the US, such a market-driven economy, is resistant to private capital,” notes Lipschultz.

“The return on capital made by the private sector from ownership of public assets is a debate still to come,” adds Taylor, executive director of infrastructure at fund manager Hastings Funds Management in San Antonio, Texas.

But there are hints that the political climate just might be taking a turn for the better.

“It’s being discussed more and more, and the quicker the use of private capital is de-politicised the better. The best infrastructure markets globally have already had that debate,” says Fraiser, a partner in the energy & infrastructure practice at law firm Allen & Overy in New York.

Of course, there’s nothing like successful precedents to win people over to the private capital cause. And there’s one obvious example of this, which is cited on numerous occasions during the course of the morning. Just a couple of weeks prior, financial close was reached on Puerto Rico’s PR-22 toll road public-private partnership (PPP). The deal – led by Spanish developer Abertis and fund manager Goldman Sachs Infrastructure Partners – was not only the debut PPP from the Puerto Rico Public-Private Partnerships Authority (PPPA), but also the first brownfield toll road project in the US since 2006.

Reaching the financial close milestone was due reward for a dynamic PPP effort launched by the PPPA in 2009 – the kind of effort which private investment professionals hope will assume the status of template for other US states and territories to copy. Collins says the sense of positivity around the deal can only be viewed as a blessing.

“The price [$1.4 billion] was around what the market was expecting and in line with initial valuations presented to Puerto Rico as early as 2007,” he says. “Also, it will boost job growth and drive economic benefits.

People will say that it was a terrific decision by [Puerto Rico governor Luis] Fortuño [to give his backing to the PPP programme].”


There is hope also that if Puerto Rico doesn’t open the floodgates, then maybe Ohio or Pennsylvania will. 

The former is currently seeking to privatise the Ohio Turnpike and wants private partners for its $3.2
billion Ohio River Bridges project. “We should hold our breath to see if Ohio or Pennsylvania are P3 [PPP] tipping points as both appear to have strong leadership from the governor’s office and supportive legislatures,” says Collins. “Encouragingly, both states have put thoughtful P3 processes in place.”

Taylor refers to Ohio as a “litmus test for private sector investment in public assets”, while Montgomery says he’s “fascinated to see what happens in Ohio”.

Until one-off successes do begin to be replicated, caution will remain.

Asked whether the PPP pipeline is likely to open up in the US any time soon, Fraiser replies: “With all due respect, that’s the wrong way to look at it. It suggests that all you need is due process. We are some way off that. Some of our clients say that if they had $10 million to invest in a project, the place they would be least likely to go is the US due to increasingly high political risk. They would rather do ‘true’ emerging markets where the use of private capital is politically benign.”

Political risk seems to revolve largely around the issue of overcoming entrenched interests in order to get deals done. “The bureaucracy can chew you up after you’ve spent millions of dollars on due diligence,” claims Taylor.

“Only at the 11th hour do you discover that the city commission is not supportive of the deal. One spends significant time and resources to bid the deal and then there’s no outcome,” chimes in Montgomery.

The two men are not referring to any particular deal. The parking lease sector has seen more than its share of privatisation processes going almost to the finishing line before blowing up in bidders’ faces. But there are so many examples of similar frustration that the descriptions provided by Taylor and Montgomery could almost be generic descriptions of typical US sales processes in the infrastructure sphere (or at least, transport infrastucture sphere).


But it’s not just obstructionist politicians that investors have to find a way around, it’s also the lack of clear, coherent processes. “There’s not consistent procurement here like there is in the UK or Australia where you have procurement models that assess what the private sector can bring,” says Taylor. “Here, the private sector differential is not assessed.”

“There is a huge amount of capital that could fl ow in to US infrastructure if only the rules were clear,” acknowledges Lipschultz.

However, drawing on his own experience in the energy sector, he makes the point that here is one area of infrastructure investment where a high level of comfort is already provided. “Clear regulation, such as that governing the pipeline system, for example, has made energy investment work well in the US,” he adds.

“That’s important because political regimes come and go. What you need is the steady hand of regulation.”

A nodding of heads around the table follows the suggestion that the aspiration going forward has to be to achieve buy-in to projects from as many stakeholders as possible right at the outset.

“For my money, one way to gain acceptance is to bring brownfield together with greenfield and invest the proceeds of brownfield projects in new projects,” says Fraiser. “Greenfield is politically benign because if you tell people, for example, that a new road will cut their commuting time in half, that’s bound to be well received. But selling brownfield assets can seem like selling off the family silver.”

Collins believes that, to gain insights into the US PPPs of the future, one should look no further than the city in which we are currently located. In July, Greenhill & Co was appointed financial adviser to New York City on potential PPPs in parking, real estate and water/wastewater treatment. In an earlier interview, he said that the city wanted to “focus on new ideas and new structures” and that transaction structures would result “that can be replicated across the US”. 

He believes that it is possible to achieve efficiencies while also working alongside organised labour in a process that “is not an outright privatisation”. As a prior example of such a process, he points to Chicago’s Midway Airport, where an attempted $2.5 billion privatisation launched in 2008 fell apart in April 2009 due to a lack of debt financing in the wake of the Crisis. “Midway was a terrific case study in generating union consensus because it had the strong support of organised labour and it’s crucial to get that buy in upfront,” says Collins. “Sadly, the deal did not reach financial close as it would have stimulated massive job growth in Chicago given the intended use of proceeds for city infrastructure investment.”

Lipschultz makes the point that, given the fi scal crises plaguing the developed world, a solution to funding infrastructure that goes beyond conventional methods simply has to be found. “Historically,
the choice was privatise or borrow more money,” he says.

“The view was ‘why choose the more diffi cult path?’ But now the world is aware of the dangers of leverage and the debt option is no longer available to many. You need to focus on efficiencies, re-invest proceeds and make sure there’s a pay-back to the community.”

Observers of the US infrastructure market will wait with bated breath to see whether the new model hinted at will move from the theoretical to the practical. One thing is for sure: where political risk is eliminated and where bidders have what Collins describes as a “legislative glide path to land the plane”, investors – both domestic and international – will come forward in numbers. The operating concession for Puerto Rico’s Luis Muñoz Marín International Airport, for example, drew 12 initial responses before being whittled down to a shortlist of six bids in September.

As well as confi dence in processes, enthusiasm for putting money to work also reflects the likelihood that deals done today will be sensible deals. “The difference in the current environment is that capital is
more prudent,” says Montgomery. “North America has gone through the ‘first generation’ of infrastructure investing and the capital markets are not as aggressive now. So it’s actually more difficult to over-gear and over-pay.”

Taylor acknowledges that there is strong competition for deals but adds that “history shows that prices only get out of control when the leverage market gets out of control”.

But while this is not a market given to over-leverage, it would be wrong to assume from this that there is a lack of liquidity. For one thing, as Taylor expresses it, “the capital markets are a big competitive
advantage here to financing infrastructure”. Adds Fraiser: “The capital markets are much deeper here than in Europe [where the debate about how to secure long-term sources of capital rumbles on]. Even greenfield opportunities can be financed much more easily.”

In terms of bank debt, Collins points to the PR-22 toll road as evidence of market strength. The Abertis/Goldman Sachs consortium managed to secure $825 million in debt fi nance from no fewer than 13 banks following a process that was over-subscribed.

However, Montgomery says that the enthusiasm of the banks for the Puerto Rico deal was, in large part, a refl ection of the lack of deal flow. “So of course, when a deal like this comes along, the banks
jump on it.” He adds that “there is a broader concern that the project finance banking community has been decimated”.

Picking up on the theme, Fraiser notes: “I’m not sure that Puerto Rico would have been over-banked had it not been for the involvement of French banks and I’d query their capacity to lend dollars on a long-term basis going forward.” He comments that the lending market will remain, for the time being, a “very fluid environment” and perhaps not too much should be taken for granted, therefore.


Thoughts now turn to where available capital is likely to be put to work. With so many talking points, transport tends to dominate discussions of US infrastructure. But to draw an accurate picture that is not
based solely on frustrated ambition, it is important to note that the US has a thriving energy industry that provides opportunity aplenty for infrastructure investors. And, because it presents a whole new layer of opportunity, shale is a hot topic.

KKR has an impressive track record in the sector. For example, it invested $350 million in East Resources, a gas exploration firm operating in the Appalachian Basin’s Marcellus Shale, in 2009, before selling it in June 2010 to Royal Dutch Shell for $4.7 billion. Says Lipschultz: “The emergence of shale gas means there’s an existing energy infrastructure in the US that needs to be reconfi gured. There are opportunities around pipelines, midstream and terminals.”

He does add, however, that while some of the opportunity around shale gas “is interesting, some has too much risk”. One obvious risk is political, as there appears to be some evidence that the extraction
of shale gas produces large quantities of greenhouse gas emissions.

The controversy around this led France, in July this year, to ban the ‘fracking’ technique for natural gas extraction. The fracking process is used widely in North America.

At least for the time being, however, there appears to be a fair tailwind for those involved in shale gas extraction.

“Politically, there is a lot of support as it’s a meaningful job creator and a compelling new tax payer, so
plenty of politicians are saying ‘I can give you support for this in my jurisdiction’,” says Collins.

Moreover the potential is enormous, with some estimates suggesting shale could account for half the natural gas production in North America by 2020. Or, as Fraiser says: “It has the capacity to turn the US from an importer of energy to an exporter so it’s a huge development.”

A San Antonio resident, Hastings’ Taylor is well acquainted with shale’s potential, given the existence
of the Eagle Ford deposit in South Texas. Taylor estimates that Eagle Ford may in total represent some “$20 billion to $30 billion worth of collective infrastructure”.


While shale is arguably the sector du jour, there are other investment areas that give those around the table cause for optimism.

They range from the prosaic (parking) to the comparatively exotic (Collins believes that state lotteries, with their stable cash flows, could be the ‘next big thing’ and would not be beyond the parameters of some infrastructure funds’ investment remits).

The most scepticism is directed at those areas of infrastructure where politicians have grand visions arguably based more on what infrastructure could do for job creation and the country’s economy rather than what’s likely to be attractive for investors. For example:

“Where does rail make money without a government subsidy?” ponders Taylor.

Rarely has the mismatch between politicians’ grand visions and the likelhood of attracting funding been as great as in the area of US high-speed rail.

Adds Fraiser: “As a general rule, new projects which are brought forward as a catalyst for economic development are not the ones that will attract private capital. People won’t put up equity against hopes and dreams.”

Do US PPPs also qualify as mere hopes and dreams? Those in attendance at the Plaza may argue that developments in New York, as well as the likes of Puerto Rico and Ohio, put genuine progress within reach.

Only time will tell, of course, whether US infrastructure lives up to its private investment potential. If it does, that really would be a talking point.



Prior to joining Greenhill, Collins was a managing director and head of infrastructure banking – Americas at Morgan Stanley. Collins has over $100 billion of infrastructure and P3 engagement experience across a variety of asset classes. Prior to his investment banking career, he was an active-duty Naval officer for five years in the US Navy Nuclear Submarine Program. He received an MBA from The Wharton School, earned a master’s degree in nuclear engineering from the Bettis Reactor Engineering School and graduated magna cum laude from Vanderbilt University in 1991 with a BE in chemical engineering.

Andrew Fraiser

Fraiser is a partner in Allen & Overy’s energy & infrastructure group and heads the North American infrastructure practice. He relocated to New York from London, where he was listed by the major legal directories as one of the top ten lawyers in the infrastructure market. Fraiser is currently advising the Virginia Department of Transportation on its P3 program and a number of sponsors and financiers on North American P3 projects in the surface transportation and accommodation sectors.


Lipschultz joined KKR in 1995 and is the global head of KKR’s energy and infrastructure business. He currently serves as a member of KKR’s management committee and the firm’s infrastructure investment committee. Lipschultz has played a significant role in many investments including DPL, International Transmission Company, Texas Genco, Energy Future Holdings, East Resources, Hilcorp Resources, RPM Energy, El Paso Midstream and Colonial Pipeline. Currently, Lipschultz is on the board of directors of Energy Future Holdings. Prior to joining KKR, Lipschultz was with Goldman Sachs & Co, where he was involved in a broad array of M&A as well as principal investment. He received an AB Honors and Distinction, Phi Beta Kappa, from Stanford University and an MBA with high distinction, Baker Scholar, from Harvard Business School.

Alec Montgomery

Montgomery joined IFM in October 2008 and is responsible for managing IFM’s North American infrastructure investment activities. Prior to joining IFM, Montgomery spent 15 years in banking focused on project and infrastructure finance. Most recently he was the head of the infrastructure finance business at the Royal Bank of Scotland in New York. Prior to RBS, he served in senior positions with Credit Agricole Indosuez (New York), Deutsche Bank (New York), and the Union Bank of Switzerland (in New York and Zurich).

Peter Taylor

Taylor joined Hastings in March 2000, is a member of Hastings’ Leadership team and deputy chairman of the Hastings investment committee. He was the responsible executive for The Infrastructure Fund from July 2000 to June 2006 and was appointed chief operating officer of Utilities Trust of Australia (UTA) in January 2004, a role which he later shared, starting in 2007. In August 2006, Taylor relocated to the US to estabish Hastings’ North American business and in September 2010 ceased to act as joint chief operating officer of UTA to focus on building strategic relationships and partnerships to further the company’s managed funds’ objectives in the areas of new investment opportunities, equity asset management and capital raising in North America.