Will long-life PE eat infra’s lunch?

Flush from raising $8.2 billion for its second long-life private equity fund – a whopping 70 percent increase on Fund I, closed in 2016 – Joe Baratta, Blackstone’s global head of private equity, is understandably excited.

“The idea of holding investments in a single vehicle with a 20-year view, an efficient fee structure and an ability to compound returns is now an asset class,” Baratta proclaimed.

Blackstone is a pioneer of long-term PE. In 2013, it started talking to investors about the possibility of holding assets beyond PE’s three- to five-year lifecycle. The firm put that idea to the test with Blackstone Core Equity Partners, designed to invest for at least a decade in “durable, high-quality companies with predictable cashflows and based in non-cyclical sectors”, Baratta said.

Predictable cashflows from durable, high-quality companies in non-cyclical sectors held in funds with 20-year lifecycles and efficient fees – doesn’t that sound awfully like… infrastructure?

Ever since the rise of infra PE – or, if you prefer, the blurring of the lines between infra and PE – it’s been hard to tell where certain investments fit. For example, one of the standout deals in Blackstone’s first long-life PE fund is Merlin Entertainments, which the firm describes as “a global leader in family entertainment and theme parks”. One of the standout investments in EQT Infrastructure IV is Parques Reunidos, “a leading operator of recreational infrastructure [including] theme parks, animal parks, aquatic parks, family entertainment centres and other attractions”.

When we caught up with Lennart Blecher, EQT’s head of real assets, in June, he told them “our definition of infrastructure includes recreational infrastructure”. So does Blackstone’s definition of long-life PE.

Another example: this week, Antin Infrastructure Partners announced it was investing in Hippocrates, an Italian firm operating a network of 120 pharmacies in the north and centre of the country. We’re sure Antin could give us very good reasons why their definition of infrastructure includes pharmaceutical infrastructure. We’re equally sure Blackstone could do the same if tomorrow it invested in a network of pharmacies out of its long-life PE strategy.

To blur the lines further, infra PE and long-life PE funds can look remarkably similar from a risk-return perspective. At the end of September, Blackstone Core Equity Partners was generating a multiple of 1.5x and a net internal rate of return of 17 percent, according to the firm’s Q3 2020 report. Documents from the Teachers’ Retirement System of New York City show 2017’s EQT Infrastructure III generating a 1.22x multiple and a 15.8 percent net IRR, as at end of March.

Does this mean long-term PE is coming for infra’s lunch, then?

Not necessarily. It’s clear some of the same assets can be held by both strategies. It’s also clear the two strategies share conceptual elements. As we detailed in our recent healthcare feature, you could argue infra managers have long-term investing in their DNA, making them better suited to running some of these assets. Having traditional PE investors increasingly willing to consider long-holds may also make them keener to look closer at infra as an asset class.

Be that as it may, it’s getting harder than ever telling some of these strategies apart.