Questions for Blackstone

The private capital giant seems confident it can deploy $40bn for its debut infrastructure fund. Its announcement last weekend nevertheless raised some eyebrows.

On paper, it all stacks up. Under President Trump, the US is looking for ways to enlist private capital in its ambitious efforts to revamp American infrastructure. Saudi Arabia has a stash of money to invest – and could soon have even more of it, if its plans to privatise part of its oil assets come to fruition. And Blackstone, who has a track record of taking new asset classes by storm through shrewdness and scale, has been looking for a way to enter infrastructure with a bang.

And thus over the weekend, hours after Trump landed in Riyadh, Blackstone announced the signing of an MoU with Saudi Arabia’s Public Investment Fund (PIF) that would see the state fund commit $20 billion to a “permanent-capital” infrastructure vehicle managed by BX. The firm would then seek to match the pledge by raising equity from third-party investors, bringing the fund to $40 billion. Including leverage, Blackstone said it expects to invest in about $100 billion worth of projects.

The move impressed the industry. “Kudos to Blackstone, who clearly anticipated the new administration’s focus on US infrastructure. By engaging in an early strategic dialogue with the Saudis, they have left a few more experienced competitors in the dust,” First Avenue’s Paul Buckley told us this week. It also impressed the markets: Blackstone’s shares have risen more than 8 percent since the announcement.

At the same time, however, the political undertones of the bargain weren’t lost on anyone. “One cannot help but think that this large commitment is as much about foreign policy – relations with the USA – as economic policy,” Buckley continued. Blackstone says its discussions with PIF started in May last year, long before Trump got elected, and hinted in earnings calls as far back as November that is was mulling something big in infrastructure. But we also know the reason an MoU was announced instead of a fully fledged deal was because the Saudis were keen on making the announcement during the President’s visit. And Blackstone CEO Steve Schwarzman’s serving as chairman of a group of business leaders advising Trump reinforces the sense that politics has likely played a part in this.

In addition to pondering its genesis, the market has also been wondering about the fund’s strategy. Yesterday, it emerged that Sean Klimczak, a Blackstone insider and energy heavyweight, will be leading the new business. Klimczak is a hitter whose personal track record includes leading the $1.5 billion Cheniere Energy deal. But his expertise does not lie with the kind of transportation, water and PPP projects Trump’s purported infrastructure programme is hoped to unlock. Neither does Blackstone have a team with such experience.

The firm will no doubt seek to hire staff to plug the skills gap. And it may well succeed in raising another $20 billion: Blackstone’s leadership in private markets has endowed it with a solid base of trusting LPs. The trick will be to deploy the money.

It's beyond doubt the US suffers from a vast infrastructure deficit. That doesn’t mean a pipeline of investable deals is there for the taking, though Blackstone is sounding confident: “We already have government agencies calling with infrastructure proposals that require billion-dollar-plus equity checks,” president Tony James told the Wall Street Journal yesterday.

Helpfully, the fund will have a wide mandate to invest in both greenfield and brownfield assets, according to sources. Assuming dealflow materialises, Blackstone will need to show it can navigate the political intricacies associated with agency-led projects. It may also have to beat direct investors with a keen eye for large-cap core assets at their own game. It’s the firm’s most ambitious business launch yet, and it appears to have to done it in something of a hurry. Never before has a private capital manager entered a new asset class with this much fanfare. What happens next will be a fascinating spectacle to watch.

Write to the author at matthieu.f@peimedia.com