Infrastructure investment is in enormous demand due to a growing need to replace and expand international infrastructure including all parts of the energy supply chain and a wide array of public services. Fewer working hours, more feasible to break into without much experience, and continuous opportunities to learn new skills, infrastructure private equity is undoubtedly growing in popularity among PE hopefuls.
1. What Is Infrastructure Private Equity?
Infrastructure private equity can be simply explained as the Private Equity that invests in infrastructure. Similar to any PE, they raise capital from outside investors, buy assets, and then sell them to make a return on investment. What makes them special is the types of assets they invest in.
Infrastructure assets include:
- Utilities (gas/electricity/water distribution, communication infrastructure)
- Transportation (airports, seaports, etc.)
- Social Infrastructure (hospitals, education facilities, etc.)
- Energy (power plants, oil terminals, renewable energy assets, etc.)
All of these assets possess several distinct characteristics that make infrastructure private equity a distinct group from traditional private equity:
- Low risk: They have relatively low volatility, managed downside risks and stable cash flows compared to traditional PE assets. Even in the most disastrous downside case, the investment would return around 3-5% internal return rate (IRR). To investors, this low risk is a strongly appetizing point.
- Strong, constant cash yield: In traditional PE, all returns depend on the exit. On the other hand, infrastructure assets have some current dividend yield and can generate high cash flows during the holding period.
- Linked to Macro indicators: Macro factors such as GDP, population growth, inflation, etc. can affect the demand for infrastructure. Thus, many investors see infrastructure as a hedge.
- Low correlation with other asset classes: returns in infrastructure investing don’t correlate closely with those in traditional PE, equities, fixed income, or even real estate. Private infrastructure provides good diversification benefits to investors’ portfolios.
Unlike traditional PE or Real Estate PE, Infrastructure PE is relatively young. About 20 years ago, they did not exist and most infrastructure assets belonged to governments or corporates who once built them.
So far, infrastructure has become a crowded space with many fund managers looking for deals globally. Yet, because infrastructure is not easily created, the supply of good deals is growing much slower than demand, leading to intense competition among funds.
2.1 Core – Low risk, consistent long-term income
Core investments consist of stabilized assets that require little operational improvement and generate returns based largely on contractual cash flows. As such, core investments are generally considered to be lower risk and focus primarily on established, brownfield projects, which do not require creating new facilities. All you need to do is not to mess up operating costs.
These assets, given their stable nature, tend to be the focus of investors with low target returns that desire consistent, long-term income. Returns are typically generated through current yield and range from 6-9% annually.
2.2 Core-plus – Somewhat more risky
Core-plus investments typically include assets in early stage or that possess less predictable revenue characteristics than core investments. Thus, these investments require a somewhat greater degree of operational management and possess greater opportunity for active management through operational improvements and asset-expansion activities.
Core-plus assets are expected to exhibit returns from both current income and capital appreciation. They generate higher returns than core investments, typically in the low teens (about 9-12%), albeit at a slightly higher degree of risk.
Ultimately, the goal of managers that utilize this strategy is to exit their investment, typically after a 6-year hold period, when the asset’s risk-profile has been reduced to more closely resemble a core asset.
2.3 Value-add – Higher risk, requires serious involvement
Value-add investments are for renovation-needed assets that require some serious operational involvement, potentially substantial business re-profiling. They are assets that have a material growth, expansion or repositioning orientation, and certain greenfield assets.
Returns are primarily from capital appreciation rather than ongoing income. The holding period for value-add infrastructure is generally shorter than for core-plus infrastructure and typically ranges from 5 to 7 years, after the manager’s value-add efforts have been completed.
2.4 Opportunistic – Riskiest of all
Opportunistic investments target assets on the higher end of the risk spectrum as a result of their exposure to greenfield/construction, non-contracted revenues, or fluctuations in market demand.
Investment managers that pursue opportunistic investments focus on reducing and controlling these risks in an effort to transform the asset into a core or core-plus investment.
Opportunistic assets can yield 15% or more in return. The majority of their returns are from capital appreciation, though certain assets can still generate a moderate amount of current yield. Holding periods range from 3 to 5 years.
|Infrastructure Fund Name||Headquarters||Target Size ($ bn)||Region focus|
|EQT Infrastructure Fund V||Sweden||14.82||Multi regional|
|ISQ Global Infrastructure Fund III||United States||12.00||Multi regional|
Infrastructure Investors IV
|United States||12.00||Multi regional|
|Stonepeak Infrastructure Fund IV||United States||10.00||North America|
|Brookfield Global Transition Fund||Canada||7.50||Multi regional|
|AMP Capital Infrastructure Debt Fund V||Australia||6.89||Multi regional|
|Digital Colony Partners II||United States||6.00||Multi regional|
|Global Infrastructure Partners Emerging Markets Fund||United States||5.00||Multi regional|
|Macquarie Infrastructure Partners V||Australia||5.00||North America|
|Partners Group Direct Infrastructure 2020||Switzerland||5.00||Multi regional|
4. Infrastructure Private Equity: Job Description
Working at infrastructure PE largely resembles traditional PE, revolving around 3 main tasks: deal sourcing, executing deals and managing existing assets.
- Deal sourcing:
Deal sourcing consists of inbound flow from bankers, competitive auctions, secondary deals from other financial sponsors, and sometimes buying entire infrastructure companies or individual assets.
- Executing deals:
When structuring and executing an investment in infrastructure, protecting the downside is extremely important. This is why infrastructure financial models are often insanely detailed, sometimes with hundreds or thousands of lines for individual customer contracts and 10+ years of projections.
- Managing existing assets:
For infrastructure assets, you will need to focus on their expenses and capital expenditure, and growth opportunities.
Will the asset need major CapEx for maintenance or expansion? What do its ongoing operating expenses look like, and are they expected to grow in-line with inflation or above/below it? Is the asset’s overall growth rate aligned to its key macro drivers, especially for “core” deals?
5. Infrastructure Private Equity: Career Path, Role & Responsibilities
In an infrastructure PE, Analysts and Associates are the two main entry points. Higher positions include Vice President, Director and Managing Director.
In many Infrastructure PE firms, employees usually specialize in different teams, such as renewables team, conventional power team, transport team, and utilities team. Even when you do not officially belong to a certain team, having experience with one type of deal will likely put you in the same type for the next deal.
At junior to mid levels, changing your specialization is relatively easy, but it is not as common when you reach senior levels.
5.1 Analyst – Working on specific aspects of deals and potential deals
Analysts are often directly hired out of undergraduate schools or non-MBA Master’s programs – not out of investment banking or consulting. Thus, they hardly have any full-time experience.
Analysts tend to work on specific aspects of deals and potential deals rather than coordinating the entire process from beginning to end.
5.2 Associate – In charge of both “deal” and “non-deal” work
In reality, some PE firms use the terms “Associates” and “Analysts” interchangeably. Some even advertise roles as “Analyst / Associate”. However, they are subtly different from each other.
The majority of Pre-MBA associates (especially in the US) are hired for a two-year to three-year program. At the completion of the program, associates are typically expected to attend a top-tier MBA program.
Compared to Analysts, Associates will be more involved in the “deal” work and lead the process from start to finish. They also handle some “non-deal” work including managing companies’ portfolios, screening for investment opportunities, and supporting the management team.
An associate can be promoted to Senior Associate after 2-3 years of outstanding performance, or attending an MBA program and then returning to the firm. The work is not much different, but Senior Associates move closer to the Vice-President-level, where they have more “manager” responsibilities.
5.3 Vice President – Deal Manager
In private equity, Vice Presidents are “deal managers.” Although Senior Associates can be promoted to this position after 2-3 years, it’s quite difficult the nature of the job changes a fair amount. And many of them end up going downmarket to advance.
Vice presidents manage the deal teams, cultivate and maintain relationships with investment bankers, consultants, potential companies and clients to generate investment opportunities and acquisition ideas. They also work with the senior partners of the fund on strategy and negotiations.
This is when soft skills start to matter far more. You need to be a good talker and presenter to advance. Very few, if any, professionals make it to this level with poor communication skills, but plenty of people with mediocre technical skills make it – as long as they talk and present well.
5.4 Director – Partner in training
Directors have a lot of decision-making power, but they don’t have the same type of ownership in the partnership that the Managing Directors/ Partners do.
Principals leave most of the deal process management to the VPs and Associates and get involved when deals are nearing the finish line, and critical negotiations are required.
They also spend more time on sourcing deals and fundraising, and they are often the ones who convince business owners to consider a sale in the first place.
5.5 Managing Director – Final Decision-Maker
Managing Director is the top position in a PE hierarchy. They are in charge of fundraising, deal origination, and “fund representation,” which could mean attending events and conferences, speaking with LPs, and doing everything required to boost the firm’s brand name and reputation.
They still spend some time reviewing deals, but they are less involved than the Directors unless it’s an extremely important deal.
Unlike the other roles here, Managing Director’s job depends 100% on human relationships. That makes it the toughest job because it’s much harder to address LPs’ concerns and convince them to invest in your fund.
6. Infrastructure Private Equity: Salary & Compensation
Salary and bonuses levels in infrastructure are lower than the traditional PE compensation. This can be attributed to the lower management fees (1.0-1.5% rather than 2.0%), and longer time to earn carry (while it is still based on 20% of the profits) and exceed hurdle rate (approximately 8%).
Below is a summary of compensation ranges in infrastructure PE firms:
|Analysts||$112K – $175K|
|Associates||$150K – $300K|
|Vice Presidents||$250K – $500K|
|Director||$400K – $900K|
|Managing Director||$750K – $1.8 million|
At pension funds, sovereign wealth funds, and insurance firms, there is no carried interest so your base salary is slightly lower and your bonus is estimatedly around 30-50% of your base salary instead of 100% of it. On the bright side, you are allowed to lead a more healthy lifestyle at these funds, with 40-50 hours of work, compared to traditional PE employees.
7. Infrastructure Private Equity: Exit Opportunities
Common infrastructure PE exit opportunities lie in specialized areas of PE such as Real Estate, or infrastructure-centered organizations like infrastructure corporates/developers and Big 4 infrastructure groups. Other possible options include investment banking, and project finance.
Moving into generalist roles is not an easy path for infrastructure PE employees since their job is expected to be very specialized.
For prospective hedge-fund candidates, it will be possible to enter an energy hedge fund since the work is largely alike. On the other hand, venture capital is completely off the list since early-stage startups’ risky, fast-changing and less predictable nature is completely opposite to infrastructure assets.
8.1 Common pathways to get into infrastructure private equity
Unlike traditional private equity, where you will need to work at a top bulge bracket or elite boutique to break into, infrastructure private equity firms are more forgiving about candidates’ backgrounds.
A potential candidate for infrastructure may come from:
- Investment Banking (especially from groups like infrastructure, energy, renewables, or power & utilities that are directly related)
- Project Finance (the debt side of infrastructure deals): his/her understanding of both debt and equity is essential to evaluate any deal
- Real Estate: some segments of infrastructure, such as schools and hospitals, overlap with real estate; also, many companies structured as REITs own infrastructure assets
- Other infrastructure-related areas of private equity (such as firms that focus on renewables, energy, or power and utilities)
- Infrastructure developers/corporations
You should have a few years of full-time experience in one of these fields before going for infrastructure PE. Firms don’t have resources to train newbies like recent graduates and undergraduates with zero experience, except PE mega-funds such as KKR, which increasingly hire private equity Analysts directly out of undergraduate.
8.2 Infrastructure private equity recruiting process
Most infrastructure PE firms use off-cycle processes to recruit. They hire new employees only when needed, and candidates may start working immediately after being offered a job. Read more about the on-cycle VS off-cycle recruiting process here.
Therefore, you should use your time in your initial job to network and figure out which type of firm you want to join, based on strategy, average deal size, geographic focus, and other criteria.
Off-cycle recruiting process usually focuses on assessing your “fit” and critical thinking abilities on deeper levels and it also requires more thought and preparation of a real investment thesis.
Headhunters have little power here, but you can plausibly win roles just from your networking efforts.
Have a look at One Search – a recruiting firm dedicated to “real assets” (infrastructure, energy, and real estate). They are the best source for positions at infra PE firms.
8.3 Infrastructure private equity interview questions
You are expected to participate in both in-person and phone interviews like in any other PE firms. You will have to answer 3 types of questions: behavioral questions, technical questions, and case studies/ modeling tests.
8.3.1 Behavioral questions
Similar to traditional PE interviews, this is the part where you tell your stories to interviewers. Recruiters will learn how your previous academic and work experience fits into private equity and their firm’ strategies you apply for.
Typical questions include:
- Walk me through your resume.
- Tell me some of your strengths, weaknesses.
- Tell me about your achievements and failures.
- Why infrastructure investing?
- Where you would you like your career to take you in the next five to ten years?
What you should prepare here are crafting your own stories (reflecting your achievements, past experience, transferable skills and leaderships), and backing up small personal stories to answer questions related to strengths and weaknesses.
If you have some disadvantages in your profile such as low GPA, non-target background, fewer outstanding accomplishments, fewer finance internships, and etc., you have to prepare stronger responses to make up for these “real weaknesses”.
8.3.2 Technical questions
Technical questions focus on the merits of different infrastructure assets, the KPIs and drivers, and how you evaluate deals and use the right amount of leverage.
Typical questions include:
- What are the key drivers and key performance indicators (KPIs) for different types of infrastructure assets?
- Walk me through a typical greenfield deal/model.
- How would you compare the risk and potential returns of different infrastructure assets? For example, how does a regulated water utility differ from an airport, and how do they differ from telecom infrastructure like a cell tower?
- How would you value a toll road or an airport?
- Why can you use high leverage in many infrastructure deals? And what are some of the important credit stats and ratios?
8.3.3 Case studies and modeling tests
For this type of questions, you will be given 1-3 hours to solve an infrastructure case study. You may use Excel, LBO modeling or real estate modeling to complete these tests, so beforehand experience with these materials is essential.
There is no need to feel stressed about the tests since they are much simpler than the on-the-job models. Projecting the cash flows and debt service and calculating the IRR are the same as always. You will only need to be familiar with some sector-specific terminology.
8.4 Infrastructure case study sample
Your firm is considering acquiring a brand-new natural gas power plant with the following characteristics:
- Capacity: 500MW
- Heat rate: 7,500Btu/kWh
- Annual dispatch: Expected capacity factor of 50%
The plant’s revenue sources include:
- Capacity payment: $135/kW-year
- Energy payment: $10/MWh, escalating at 2% per year
Operating expenses include the following:
- Fixed O&M expense: $30/kW-year, escalating at 2% per year
- Variable O&M expenses:
- Labor and operations: $5/MWh, escalating at 3% per year
- Water and consumables: $1/MWh, escalating at 2% per year
Annual fuel is not an expense because the contract counterparty provides it.
Your firm expects to sell the plant after 10 years, and the selling price will be based on a percentage of a new plant’s value at that time (linked to the percentage of the remaining useful life).
Comparable projects cost $1,000/kW currently and are expected to increase in price at 2% per year, with a useful life of 40 years.
The Debt will be based on the following terms:
- Tenor: 10 years, fully amortizing
- Interest Rate: 5%, fixed rate
- Amortization: Sculpted amortization to achieve a 1.40x Debt Service Coverage Ratio (DSCR) in each year based on Cash Flow Available for Debt Service (CFADS)
Please value the power plant on an after-tax basis using a 12% Cost of Equity and assuming a 25% tax rate and 20-year depreciation based on MACRS.