Is it possible to go back to the way things were? Nostalgia for the old regulated model seems to be waxing of late, particularly in Virginia. The 70-percent rate increases in Maryland last year at...
A New Vintage of Investor
Rothschild investment banker Roger Wood explains why those new infrastructure funds are hot on utilities.
asset always will be larger than as one of many shareholders, even if they end up being the largest shareholder. In addition, they can take advantage of incentives from regulators that are not available to existing utility owners of transmission assets.
Fortnightly: Given that there is a limit to the number of assets available on the market, are restructuring funds contemplating purchasing whole utilities outright and then selling the segments to other infrastructure funds interested in only specific pieces?
Wood: I don’t think anyone has explicitly said that, but part of what you are seeing with funds trying to buy whole utilities (like Macquarie and Babcock & Brown buying DQE and Northwestern, respectively), is it gives them the potential to do that. And these particular institutions are set up as deal machines—they act as advisors, as underwriters, as asset managers. If they were to break up and sell off businesses after they own them, they would have another way to make money off these transactions that may not be available to investors as a whole. Now, if they end up getting a great price for an asset that they sell, obviously the outside investors get a piece of that, so that’s fine. But it’s a bit like the hedge fund math. The fund managers always will do better than the end investors because of the fee structure that they have.
Fortnightly: What kind of returns do the infrastructure funds expect, and what is their holding period?
Wood: I would say most of the infrastructure funds are looking at low-double-digit returns on equity. The funds almost all would say that they are looking at longer time periods than the 5 to 7 years normally associated with private equity. If you take Warren Buffett as an example, I think he defies categorization, because some people would think of him as private equity, some people would think of him as an infrastructure investor, and some people would think of him as a saint. But his view when he was buying PacifiCorp was, “I never intend to sell this. I intend to own this for the rest of my life.” People may or may not believe that. Same with Goldman Sachs, which just raised a $6.5 billion infrastructure fund. They have said that they intend to hold for the long term, and that may very well be their intention. But I think they would have no hesitation selling if someone made them an attractive offer.