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2017-05-26 08:17:03
Blackstone Joins Forces With Saudis on U.S. Infrastructure Investments

A little over a year ago, the private equity titan Stephen A. Schwarzman sat down with Mohammed bin Salman, the deputy crown prince of Saudi Arabia and chairman of the kingdom’s largest sovereign wealth fund, in hopes of expanding their relationship.

Mr. Schwarzman’s company, the Blackstone Group, already counted Prince bin Salman’s Public Investment Fund as a major client. But the American financier now had a bold new idea: Court Saudi money to invest in projects like tunnels, bridges, airports and other sorely needed infrastructure improvements, predominantly in the United States.

It was a prescient notion. Thirteen months and one election upset later, Mr. Schwarzman, who leads an elite committee of business executives advising President Trump, has announced a $20 billion cornerstone investment by the Saudi entity in a soon-to-be-created Blackstone infrastructure fund.

That investment vehicle, which Blackstone plans to double in size, represents a new focus for the firm. More important, the fund — announced during Mr. Trump’s visit to Riyadh, the Saudi capital, and a summit meeting of global chief executives that Mr. Schwarzman attended — dovetails with a $1 trillion infrastructure initiative the Trump administration has promised, to be fueled by government partnerships with the private sector.

“No one else is in all the categories of infrastructure, in all the regions of the world and all the different classes of infrastructure,” Hamilton E. James, Blackstone’s president, said in an interview after the deal was announced on Saturday. “So I think we have an opportunity to establish overnight a leadership position.”

Indeed, less than a week after the Public Investment Fund’s contribution was revealed, Blackstone’s marketing to other investors has already begun.

But its pitch will be made in a crowded field. The low interest rates that led to richly valued stock and bond markets have made infrastructure investing increasingly attractive, and others are seeking similar opportunities.

There may also be political hurdles. Blackstone’s $40 billion push and others like it appear to be a bet that the Trump administration, while troubled by its own brand of volatility, will be able to unleash a wave of spending on roads, bridges and other public projects.

Investments in projects like bridges and roads — either by taking stakes in existing infrastructure or by putting up money to build something new — are, by nature, often longer-term than the corporate buyouts and real estate deals that are typically associated with private equity firms.

Yet they also have the benefit of being less volatile investments that produce steady returns.

Infrastructure investments average returns of 10 percent a year, according to the data provider Preqin: less than an investment in a basket of stocks in the Standard & Poor’s 500 index would have generated for much of the past decade, but without the wrenching ups and downs of the public market.

“The appetite for infrastructure investing is really strong, and investors are currently looking to increase their exposure right now,” said Tom Carr, an expert in infrastructure investing at Preqin. “The returns have been very stable, and because these are long-term investments, they sit very well in the portfolios of pension funds and insurance companies.”

In North America, the territory where much of the infrastructure money is raised, fund-raising activity has been on a tear in recent years, with infrastructure investors now overseeing $376 billion, Preqin calculates.

Still, there is a long road ahead. Private-sector investing in infrastructure is a nascent business in the United States, compared with countries like Canada and Australia.

And while Mr. Trump has vowed to streamline the permitting process for construction projects and has proposed a budget earmarking $200 billion for infrastructure over the next 10 years, his handling of an F.B.I. investigation into his campaign’s ties to Russia has raised doubts about what he can accomplish in Washington.

Private equity experts also cautioned that the commitment of such a large sum to one fund by a single investor, as in Saudi Arabia’s case, is highly unusual. While Blackstone will be making the investment decisions, navigating the merits of various deals with such a large and influential partner will add complexities that more diversified funds do not face.

Some of those are practical, and others optical.

“If I’m driving from here to New York, do the tolls I pay contribute to the improvement of the roads I’m on? Or is it returned to the Public Investment Fund?” asked Simon Henderson, a senior fellow at the Washington Institute for Near East Policy who has written extensively about the Saudi royal family and its economic plans. “In domestic political terms, that doesn’t work.”

Blackstone executives say they are undaunted by the political opposition Mr. Trump’s efforts may face, and note that their infrastructure fund plans began when Hillary Clinton was generally regarded as the most likely next president.

“I don’t think we can wait or expect Washington to fundamentally change its ways,” said Mr. James, who raised money for Mrs. Clinton’s campaign. “So we try to set up our business to thrive regardless of what happens down there.”

He added that, despite his boss’s advisory role in the Trump administration, the White House was not involved in Blackstone’s deal with the Saudis.

Farther from the presidential limelight, Blackstone’s competitors have managed to profit and grow in an environment that is widely regarded as cumbersome for infrastructure projects, which often require dozens of legal permits and years of waiting.

Attractive infrastructure investments can vary. Some deals involve existing assets, like taking stakes in airports or major shipping ports with the aim of building up value and then locking in profits with a sale.

Other projects, such as gas pipelines and power generation plants, have longer life cycles, with a fund — often with a partner in tow — backing investments at the start-up phase.

Private equity firms like Global Infrastructure Partners have carved out highly lucrative niches by buying and selling airports in London and pipelines that pump gas from Wyoming to California.

That firm, founded by Adebayo O. Ogunlesi, a former top banker at Credit Suisse, is the second-largest player in the private equity infrastructure sector, according to Infrastructure Investor, a trade publication. Founded in 2006, the company now manages $40 billion and, like Blackstone, recently announced its own record capital raising, with a new $15.8 billion fund.

Mr. Ogunlesi is well connected, too. A member of the president’s advisory council led by Mr. Schwarzman, he is also the lead director on the board of Goldman Sachs, where a number of the president’s top aides once worked.

He declined, through a spokesman, to comment for this article. But in a recent interview with Infrastructure Investor, Mr. Ogunlesi was measured in his assessment of the White House.

“If there’s anything encouraging about the direction of the Trump administration, it’s that they want to streamline the regulatory approval process in the U.S., which I think is necessary, and I don’t think they need to be less concerned about the environment,” he said, in a nod to the regulatory hurdles that have thwarted a number of infrastructure projects.

Blackstone first sought to do infrastructure investing in 2008, when it raised about $1 billion and hired executives from Macquarie, the Australian bank that pioneered modern infrastructure investing, to start a new fund.

But then the financial crisis hit, investor appetite dried up, and the recently hired infrastructure specialists left and started their own fund, Stonepeak Infrastructure Partners, in 2011, leaving Blackstone without a dedicated infrastructure fund for years.

This week, Blackstone named Sean Klimczak, a senior managing director from the firm’s private equity group who had been involved in corporate infrastructure projects as part of that job, to lead its new effort. With the $20 billion from the Saudis, an expected $20 billion from other outside investors, and the possibility of borrowed capital to finance individual projects, Blackstone hopes to generate up to $100 billion in total spending power.

Blackstone executives say they are in the early stages of identifying potential infrastructure investments and most likely will not pin down specific projects for weeks to come.

“We’ll probably focus on large projects that are complex and have longer lead times, just because that’s where the competition will be less,” Mr. James said.

Those could range from schools and hospitals to highways, airports and bridges, depending on where the need and the potential returns are.