Why Infrastructure / Energy Private Equity? Is my answer convincing?
Hello -
I have an upcoming first round at a leading infrastructure PE firm. I have focused my recruiting primarily on traditional PE focusing on LBOs, but came across this opportunity and decided to interview for it. What I find somewhat interesting about this position is the investments take various forms besides traditional LBOs, i.e. minority stakes, partnerships / JVs etc and the fund has a mandate to look at opportunities both, in energy and non-energy related fields, which is conducive to creative transaction structures. This added complexity is something I think I'd enjoy. I don't want to give a corny answer such as "infrastructure is impactful and helps society"
Do you think my answer is convincing enough, or does it make me sound like someone who's not getting a traditional LBO PE job and interviewing for an infrastructure fund? I may have answered my own question above but wanted to get this forum's view on how to convincingly portray my interest in the position...
Thanks
From my experience, infrastructure funds during recruiting processes try to flush out candidates who know the difference between a traditional PE fund and infrastructure fund. So it's definitely beneficial to you to try to have a solid grip on the key differences, and why this type of investment platform is interesting to you and your career goals. Which, I know, is easier said than done. Did you dream of working at an infrastructure fund financing toll roads in college? Yeah, me neither.
Here's an example of why, at least I think, is a good indication of interest in the space: " The growing need to replace and expand international infrastructure is outpacing traditional public funding sources and has created a large need for private capital. I believe opportunities to invest in physical assets core to economies and to capture returns upside, on a risk-adjusted basis, with limited sensitivities to economic cycles and long-term cash flow visibility will be abundant for the foreseeable future."
Some specific aspects to infrastructure funds ("IF's") vs. PE: - IF's typically target businesses with longer-term contracts, which = surety of cash flows. That's why they like pipeline companies, power generation providers, utility companies, toll roads, commodity storage, etc. - With a longer holding period and a lower return threshold (generally 10-15%), IF's can pay significantly more than a private equity sponsor for certain deals - IF's also differ from traditional PE funds in that they target a “cash on cash” return as well and generally like to structure transactions to allow for distributions (10% of initial equity is generally the goal, but 5-6% is acceptable) - Further, IF's generally like to maintain investment grade ratings
thank you, very useful info
Regarding the difference between traditional PE and IF, does traditional PE not target "cash on cash" as well? I figured that was similar to MoM. I'm also curious what you mean by "IFs generally like to maintain investment grade ratings"?
bump - any other responses would be appreciated as well.
Stringer Bell's reply is on point. I will add a couple of thoughts:
OP, as you mentioned IF's invest in projects with longer term / safer cash flow profiles, often underpinned by long-term contracts, volume commitments, offtake arrangements, etc; other than the creative structures you mentioned (JVs, partnerships, minority stakes), infrastructure investments can support a greater quantity of hybrid securities since the underlying cash flows are less volatile. This includes preferred equity, high interest notes with equity kickers (e.g. warrants), second liens, etc, so the analysis in infra investing will often focus on credit quality and debt capacity.
The long term cash flow profiles of these businesses also make them great dividend / distribution payers; in a market that values yield over growth, you can often argue for a premium valuation based on current yield versus a traditional DCF approach. Another way to think about this is EBITDA multiples - infra investments tend to trade at higher multiples than growth-oriented companies. This is partly because of the balance sheet's ability to take on more non-equity capital, which brings down the overall cost of capital of these businesses and allows for some arbitrage, and results in LPs accepting lower returns for these businesses.
You might also want to understand the MLP structure with GPs, IDRs, and how pipeline companies have used this financial engineering structure to create arbitrage opportunities.
Hi - could you provide some more details on how funds have been able to do this? For example - if they are buying a toll road at 12x; how are they able to return a 10% IRR to their LPs.
I think that’s a solid answer. You are definitely thinking the right way. But also just be prepared for a question like “Infrastructure isn’t the only space where you do more than the standard LBO. What about the infrastructure space itself are you are interested in?” While that likely WOULDN’T be a followup question, it is certainly a reasonable one to be prepared for
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