When Stonepeak Infrastructure Partners considers a deal, around 25 people, including the investment committee and deal team, meet in a long, sleek boardroom on the 14th floor of a midtown Manhattan office building, and what is called the “truth-discovery process” begins.
The firm holds an open discussion about the merits and pitfalls of a potential investment. The deal team has already whittled down the options from 99 to one, and now it’s a no-holds-barred forum to “find what the truth of the matter is”, Trent Vichie, co-founder of Stonepeak, says.
“We want to hear the opinions of the most senior person on the deal to the most junior,” Vichie explains.
Sitting in the boardroom, Vichie, along with his partner in the business, Mike Dorrell, tell Infrastructure Investor this process at the end of deal sourcing is the “secret sauce” that’s helped Stonepeak go from a $1.65 billion first-time fund in 2013 to a $7.2 billion final close for Fund III in July. It’s helped keep the feel of a small firm as well, they say.
“We can say anything to each other and there’s no offense. We’re just trying to find the facts and the truth,” Dorrell says.
He and Vichie, two Australians who met at Macquarie’s New York office in 2001, have together built an infrastructure firm that has become one of the largest and best-regarded fund managers in the industry after launching seven years ago.
Rebounding from a failed fundraising at Blackstone earlier this decade, which they both blame on “appalling” timing (coming amid the ‘great recession’), they and Stonepeak are expecting a lot more of these truth-discovery processes as they prepare to deploy Fund III, to show they can invest and properly manage their current assets.
Dorrell and Vichie both worked at Macquarie together before arriving at Blackstone in 2008 to raise that firm’s first-time infrastructure fund.
Dorrell and Vichie have their similarities and differences. They both hail from the Sydney area and have spent the majority of their careers in the US. Where Dorrell is excited and talkative, Vichie speaks short and directly. And what Vichie lacks in height to Dorrell, he makes up with a full head of hair.
When the two joined Blackstone, they were eager about the opportunity. They were going to build an infrastructure programme at a large, well-known firm, starting with a $2 billion fundraising.
But soon after starting, reality hit in the form of the great recession.
“The first week we were there was the week AIG went under. We went right into the crisis,” Vichie recalls.
Still, it was at Blackstone they learnt a principle of investing that’s informed their strategy at Stonepeak. Despite tough market conditions – or perhaps because of them – the two say a rule taught by Blackstone founder and chief executive Stephen Schwarzman has stuck with them over the years.
“You make money by not losing money,” Dorrell explains. “If you want to summarise how we approach investing, that’s it.”
Frugality may not have been so hard to learn in a post-recession environment, especially when commitments to the fund were just not coming through. “We met every LP we wanted to meet,” Dorrell continues. “It was just a woeful time to be doing it.”
Vichie adds: “People were literally hiding under their desks.”
After 18 months of fundraising and not much to show, Blackstone decided to close the programme, and Dorell and Vichie agreed to part ways. It was then they decided to try branching out on their own.
The birth of Stonepeak
Dorrell and Vichie started to build Stonepeak from the ground up, and in the early days, their excitement about running their own business came at all hours.
“It got to the point where Trent’s wife said I can’t call Trent before 7am on weekends,” Dorrell says, laughing. “When we were planning the business, she would answer, ‘Is this Mike again?’.”
The two quickly saw benefits to running things themselves. Unlike at larger fund managers, owning a small firm means Dorrell and Vichie don’t have to “go up another level of management” or “squabble with another line of business”. Stonepeak today employs 63 people, including operating partners, and has offices in New York and Houston.
They set the rules, and three important ones they’ve kept since launching Fund I are to hire well, invest well and be transparent with LPs.
The importance of hiring well comes from the open-debate culture Dorrell and Vichie try to instil at Stonepeak, and it extends past finding someone smart enough to spot a good deal. “You can have the smartest person in the world, but if they have a massive ego and don’t want to be questioned and debated, that’s not going to work,” Dorrell explains.
When it comes to investing well, their strategy comes down to a combination of Schwarzman’s philosophy of “making money by not losing it” and the nature of infrastructure investments – “defensive real returns”, they call it.
Just like the long, stable cashflows that are a hallmark of infrastructure assets, Dorrell and Vichie have tried to keep a steady hand when deploying capital. “Every deal should at least preserve its capital,” Dorrell says.
To do that, they stay away from high-leverage financing (no more than 35 to 40 percent), according to Vichie. Stonepeak also regularly emphasises the low multiples they pay for assets, but not always, depending on the growth potential for the asset in question.
There’s nothing in Stonepeak’s more than $15 billion of managed assets that better explains the process they go through to close a transaction than their investments in the communications sector, which includes companies like ExteNet, Cologix and Vertical Bridge. When Stonepeak started investing in telecoms around 2015, the sector wasn’t as hot as it is now, making them an early-mover.
At one point, a $1 billion-plus investment came up for debate. Stonepeak was investing from its first fund, and it was going to cost a cash multiple in the low double-digits, higher than the 8 times Dorrell and Vichie are comfortable with.
“Trent was on the ‘let’s do it’ side of that debate, and I was on the ‘wow, this is a pretty high multiple for this business’ side’,” Dorrell says. “We ultimately did it […] and you know what, Trent was absolutely right on that, and I was wrong. That deal has turned into one of our best investments and has really put us at the forefront of the communications infrastructure sector.”
This approach, and the strategy for Funds I and II, and now Fund III, to invest in North American assets has defined Stonepeak’s investments to date. They’ve so far made 20 investments in sectors including communications, midstream oil and gas, transportation, power and water.
According to documents posted online in March by the New Mexico Educational Retirement Board, Fund I is generating a 9.8 percent net internal rate of return and Fund II, which closed in 2016 on $3.5 billion, is generating a 17.5 percent net IRR.
This strategy, combined with the final tenet of their business philosophy – be open with your LPs – has helped Stonepeak build a stable of repeat investors, which has made each fundraising that much easier. Starting with TIAA, which anchored Fund I with a $400 million commitment and has maintained a relationship with Stonepeak throughout its successive fundraises, the firm has also had re-ups from the Washington State Investment Board, the Oregon State Investment Council and the Teacher Retirement System of Texas, among others.
“If you invest well, you’re good to your LPs and they can see you have great people, that’s going to generate repeat investors,” Dorrell explains. “If any of those things fall down, the others start to fall.”
Repeat investors, a market that’s now “cashed up” after recovering from the recession, and LP allocations on the rise made raising Fund III a “night-and-day” difference from their first try, Vichie says.
“Fund I, you’re in a nightclub looking like Zach Galifianakis; Fund III, you’re Brad Pitt,” Dorrell jokingly adds.
Stonepeak Infrastructure Fund III is charging a 1.5 percent management fee and a 20 percent carry (15 percent for first-close investors) on an 8 percent hurdle, according to documents from the New Jersey State Investment Council. Investors in the fund include the US LPs mentioned earlier, but Stonepeak also received more commitments from overseas investors than in previous raises.
Pensions and insurance companies were two big growth markets, Dorrell says. European LPs represent around 25 percent of the fund, 15 percent from Asia and around 10 percent from the Middle East and Australia.
Dorrell credits the attraction of the US market with luring overseas investors. He says strong US GDP growth and the lack of cross-border complications that exist in other markets is feeding this interest.
The two gave the impression that possible US government reform to open infrastructure investments is an afterthought in their near-term strategy. Most of the sectors Stonepeak has invested in or is targeting are sectors that are already heavily managed by the private sector, they say.
“We’d love to see the US market develop more PPPs,” Vichie says.
“The US has got far and away the best energy sector in the world, because it’s all private entrepreneurs,” Dorrell follows.
However, one area they both agree would attract their interest if the government intervened is airports. They are part of the global chorus of people who bemoan the state of US airports and believe private investment can turn them around.
“Clearly there’s a lot of private capital ready to go into airports, and there’s a lot of benefit to the country from finding a way for that to happen,” Dorrell says.
New York, New York
As Stonepeak prepares to invest Fund III, the business Dorrell and Vichie began seven years ago continues to grow in more ways than capital deployed.
Having outgrown its 14,000-square-foot headquarters on 55th Street, the firm is trading in the corporate hustle and bustle of Midtown for a 48th floor view in the Hudson Yards area, including 30,000 square feet of new office space. Stonepeak is also planning a new office in Austin, Texas, which will serve as a central hub in the US and will also provide support to is Houston office.
Dorrell and Vichie will move to the Austin office, partly for family considerations, they say. However, they know New York is still the capital of dealmaking and plan to spend plenty of time in the city, where Stonepeak’s headquarters will remain. “We’re going to be in New York all the time,” Dorrell says.
That dealmaking clock has already started on Fund III’s five-year investment period, and the firm has already inked two deals – one backing cold storage transportation company Lineage Logistics and the other a midstream joint venture with US-based Targa Resources Corporation.
After starting the firm from nothing, Dorrell and Vichie are aware how far reputation and a good track record has taken them and how important it is to their future.
“People look at what you’ve done and decide if that’s what they want to invest in,” Dorrell explains. “That’s a lot easier than talking theoretically about how you will invest.”
As Vichie puts it: “We live and die by the results of what we do.”