The news that Kohlberg Kravis Roberts would be charging investors in its debut infrastructure fund a 1 percent management fee and a 10 percent carried interest rightfully set off ripples in an asset class where investors have long tried to apply private equity-style fees to lower-yielding assets.
But a closer look at KKR's infrastructure strategy reveals that the firm has thrown down the gauntlet to existing infrastructure GPs in more ways than just its fee structure.
KKR, a bastion of private equity for more than 30 years, is not just now entering infrastructure. The firm is instead informing prospective investors that it has made more than $3.5 billion of infrastructure and infrastructure-like investments since 2000 from its existing private equity funds.
Among these are electric and gas utilities deals such as its 2003 acquisition of ITC Holdings, communications deals such as its 2004 acquisition of satellite service provider PanAmSat Corporation and waste management deals like the 2005 acquisition of Duales System Deutschland. KKR's 2007 buyout of Texas utility TXU also falls into the infrastructure bucket.
Electric utilities, communications and waste management assets that display stable, protected cashflow characteristics are certainly eligible for the infrastructure hard hat. But if KKR originally bought the assets as a private equity player making – undeniably solid – returns of 5.5x on its realised investments, that poses several difficult questions for GPs who call themselves infrastructure specialists:
• Where is the line of demarcation between private equity and infrastructure?
• What are the appropriate fees to charge on such investments going forward?
• What is the return differential between private equity and infrastructure?
These are questions that infrastructure GPs have been struggling with for a long time; now, answering them will prove more crucial than ever as they compete for funds with the likes of KKR and Blackstone.
It is likely that as more private equity firms enter infrastructure, their preferred marketing strategy will be to reposition their track records as infrastructure by cherry-picking representative transactions, à la KKR.
This will continue to pose thorny questions to existing GPs in the asset class. At the same time, it will present a golden opportunity to appropriately define and demarcate the asset class once and for all.