Infrastructure Private Equity: The Definitive Guide
We have published a few interviews about it (along with project finance jobs), but we’ve never released a course on it, for reasons that will become clear in this article.
And while I’m skeptical about the long-term prospects of private equity, especially at the mega-funds, there are some bright spots – and I think infrastructure is one of them.
But before delving into deals, top firms, salaries/bonuses, interview questions, and exit opportunities, let’s start with the fundamentals:
What is Infrastructure Private Equity?
At a high level, infrastructure private equity resembles any other type of private equity: firms raise capital from outside investors (Limited Partners) and then use that capital to invest in assets, operate them, and eventually sell them to earn a high return.
Profits are then distributed between the Limited Partners (LPs) and the General Partners (GPs) – with the GPs representing the private equity firm.
Just as in traditional PE, professionals spend their time on origination (finding new assets), execution (doing deals), managing existing assets, and fundraising.
The difference is that infrastructure PE firms invest in assets that provide essential utilities or services.
Real estate private equity is similar because both firm types invest in assets rather than companies.
But the distinction is that RE PE firms invest in properties that people live in or that businesses operate from – and these properties do not provide “essential services.”
Sectors within infrastructure include utilities (gas, electric, and water distribution), transportation (airports, roads, bridges, rail, etc.), social infrastructure (hospitals, schools, etc.), and energy (power plants, pipelines, and renewable assets like solar/wind farms).
Many of these assets are extremely stable and last for decades.
Some, like airports, also have natural monopolies that make them incredibly valuable (well, except for when there’s a pandemic…).
Infrastructure assets have the following shared characteristics:
- Relatively Low Volatility and Stable Cash Flows – Power plants can’t just “shut down” unless human civilization collapses.
- Strong Cash Yields – Unlike traditional leveraged buyouts, where all the returns might depend on the exit, infrastructure assets usually yield high cash flows during the holding period.
- Links to the Macro Environment and Inflation – Investors often view infrastructure assets as “inflation hedges” because they’re linked to population growth, GDP, and other macro factors that change the demand for infrastructure.
- Low Correlation with Other Asset Classes – For example, returns in infrastructure investing don’t correlate that closely with those in traditional PE, equities, fixed income, or even real estate.
On the last point, here’s what JP Morgan found when comparing infrastructure, real estate, and the S&P 500 from 1986 to 2013:
Holding periods are also longer, partially because customer contracts tend to be lengthy, such as power purchase agreements that last for 15 years.
Overall, infrastructure private equity sits above fixed income but below equities in terms of risk and potential returns; it might be comparable to mezzanine funds.
The History and Scale of Infrastructure Investing
The entire field of “infrastructure investing” on an institutional level is relatively new; it didn’t exist on a wide scale before the year ~2000.
It started in Australia in the 1990s, spread to Canada and Europe in the early 2000s, and eventually made its way to the U.S. as well.
Partially because it is a newer field, infrastructure private equity has raised less in funding than real estate private equity or traditional private equity:
- Infrastructure PE: $50 – $100 billion USD per year globally
- Real Estate PE: $100 – $150 billion
- Traditional PE: $200 – $500 billion
Despite the lower fundraising, “small deals” are quite rare in infrastructure because of the nature of the assets.
The average deal size is over $500 million, and the top 10 deals each year are in the multi-billions, up to $10+ billion.
Public Finance vs. Project Finance vs. Infrastructure Private Equity vs. “Infrastructure Investing”
Several terms are closely related to infrastructure, so let’s go down the list and clarify the differences before moving on:
- “Infrastructure Investing” – This one is the broadest term and could refer to investing in the debt or equity of infrastructure assets. Investors could fund the construction of new assets or acquire existing, stabilized ones. And the investors could be PE firms, pensions, sovereign wealth funds, and many others.
- Infrastructure Private Equity – This term refers to investing in the equity of infrastructure assets to gain ownership and control. There are dedicated infra PE firms, but plenty of pensions, large banks, SWFs, and other entities also make “equity investments in infrastructure.”
- Project Finance – This one refers to investing in the debt of infrastructure assets (both new and existing ones), which is mostly about assessing the downside risk, how much money could be lost in the worst-case scenario, and then offering terms commensurate with the risk.
- Public Finance – This one also relates to investing in the debt of infrastructure assets, but in this case, it’s to support governments and tax-exempt entities that need to raise funds to build assets.
Infrastructure Private Equity Strategies
The main difference is slightly different names: “greenfield” refers to brand-new assets that a sponsor is building, while “brownfield” refers to existing assets that it is acquiring.
Here’s a quick summary by category:
- Core: There’s limited-to-no growth here; examples might be regulated electricity distribution assets, such as power lines. Governments set rates, so there’s little revenue risk. Most of the returns come from the asset’s cash flows, and the expected IRRs are usually below 10%.
- Core-Plus: These assets have modest growth potential (via additional CapEx or other improvements), or they’re stabilized assets operating in regions outside developed markets. The expected IRRs might be in the low teens.
- Value-Add: These assets require serious operational improvements or re-positioning. The risk and potential returns are higher, and more of the potential returns come from capital appreciation rather than cash flows during the holding period. An example might be acquiring a small airport and then performing additional construction to turn it into more of a regional hub.
- Opportunistic: These deals are the riskiest ones because they often produce limited-to-no cash flow for a long time, and they depend on building new and unproven assets (e.g., a new power plant or toll road). The potential IRRs might be 15%+, but there’s also a huge downside risk.
A single infrastructure PE firm could have different types of funds, each one specializing in one of these categories, but in practice, the first three strategies are the most popular ones.
One final note: in addition to everything above, public-private partnerships (PPP) represent another strategy within this sector.
For example, a private firm might build a toll road, and the local government might guarantee a certain amount in revenue per year as an incentive to complete the project.
Sometimes PPP deals are labeled “core” even when the asset changes significantly or is built from scratch because the revenue risks are much lower if there’s government backing.
Yes, construction overruns and delays could still be issues, but the overall risk is lower.
The Top Infrastructure Private Equity Funds
You can divide infrastructure investors into a few main categories: actual private equity firms (“fund managers”), large banks, pension funds, sovereign wealth funds, and the investment arms of insurance companies.
Technically, only the private equity firms count as “infrastructure private equity” – but each firm type here still invests in the equity of infrastructure assets.
For many years, fund managers dominated the market, but institutional investors such as pension funds have been building their internal investment teams to do deals directly.
Private Equity Firms and Fund Managers
Some PE firms focus on infrastructure; examples include Global Infrastructure Partners, IFM Investors, Stonepeak Infrastructure Partners, I Squared Capital, ArcLight Capital, Dalmore Capital, and Energy Capital Partners.
Then, some firms invest in a broader set of “real assets,” with Brookfield in Canada being the best example (it has also raised the third-highest amount of capital for infrastructure worldwide).
In the U.S., Colony Capital and AMP Capital are examples (they do both real estate and infrastructure).
Finally, there are large, diversified private equity firms that also have a presence in infrastructure, such as KKR, EQT, Blackstone, Ardian, and Carlyle.
The biggest “infrastructure investing firm” worldwide is Macquarie Infrastructure and Real Assets (MIRA), which is a branch of the Australian bank Macquarie.
Many of the other large banks also do infrastructure investing, but they often use different names for their infra businesses (e.g., Goldman Sachs and “West Street Infrastructure Partners” or Morgan Stanley and “North Haven Infrastructure Partners”).
JP Morgan and Deutsche Bank are also active in the space.
There are also infrastructure investment banking groups, which advise sponsors and asset owners on deals rather than investing in debt or equity directly.
Canadian pension funds, such as CPPIB and OTPP, are some of the biggest investors in the infrastructure space, and they all have internal teams to do it.
These funds have advantages over traditional PE firms because their returns expectations are lower, and they’re non-taxable in Canada, so they can afford to out-bid other parties and pay high prices for Canadian assets.
In Europe, various pension managers, such as APG and PGGM in the Netherlands and USS in the U.K., also invest in infrastructure, and in Australia, plenty of “superannuation funds” (AustralianSuper, QSuper, etc.) also do domestic infrastructure deals.
Sovereign Wealth Funds
These are very similar to pension funds: historically, they acted as Limited Partners, but they’ve been building their internal teams to invest in infrastructure directly.
Just like pensions, they also target lower returns, but they also have far more capital since they’re backed by governments in places like the Middle East and Asia.
Names include the Abu Dhabi Investment Authority, the Abu Dhabi Investment Council, the China Investment Corporation, and GIC in Singapore.
Most insurance companies do not invest directly in infrastructure, but many are Limited partners of existing funds.
Well-known names include Swiss Life, Allianz Capital Partners in Germany, and Samsung Life Insurance in South Korea.
Other Investment Firms
There are plenty of “miscellaneous” firms that do infrastructure investing as well.
For example, some construction companies invest their cash into infrastructure, and some larger, energy-focused PE funds such as Encap and Riverstone have also gotten into it.
There’s a blurry line between “energy private equity” and “infrastructure private equity” in the U.S., which is why firms like ArcLight and Energy Capital could be in either category.
Infrastructure Private Equity Jobs: The Full Description
The infrastructure private equity job is quite similar to any other job in PE: a combination of deal sourcing, executing deals, and managing existing assets.
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.
Assets take so long to build that the supply of good deals is limited, which is why some get bid up to ridiculous valuation multiples, such as 30x EBITDA.
When evaluating deals, assessing the downside risk is critical because the upside is quite limited.
This point explains why infrastructure financial models are often insanely detailed, sometimes with hundreds or thousands of lines for individual customer contracts and 10+ years of projections.
You can’t just say, “Assume revenue growth of 5%” – it has to be backed by contract-level data and extensive industry research.
As in real estate, infrastructure deals often use high leverage (think: 80%+), and the debt may be “sculpted” to meet a minimum Debt Service Coverage Ratio (DSCR) requirement:
When you evaluate deals, you focus on:
- Contracts – How does the asset earn revenue, how much water/electricity/energy has it promised to deliver, and are there any onerous terms? Are there step-ups for inflation? Are any counterparties promising to pay for fuel or other expenses?
- Expenses and CapEx – 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?
- Growth Opportunities – The asset’s overall growth rate should be aligned to its key macro drivers, especially for “core” deals. For example, if air traffic in the region is growing at 2% per year, but an airport’s revenue is growing by 5%, something is off – unless the airport is planning to expand in some way.
- Downside Protection – What happens if inflation exceeds expectations? How easily can customers cancel their contracts? If something goes wrong, does the government back the asset or promise anything? What if there’s a construction delay or cost overrun?
- Debt – How much leverage is being used, what are the rates, and how much refinancing risk is there? Could the asset potentially support a dividend recap? Is there any chance that it might not be able to comply with covenants, such as a minimum Debt Service Coverage Ratio (DSCR)?
Infrastructure Private Equity Salary and Bonus Levels
Now to the bad news: salary and bonus levels in infrastructure range from “a bit lower” to “quite a bit lower” than traditional private equity compensation because:
- Management fees tend to be lower (1.0% to 1.5% rather than 2.0%).
- Carry is still based on 20% of the profits and an ~8% hurdle rate, but since holding periods are much longer, it takes more time to earn the carry. Also, it’s more difficult to exceed the hurdle rate.
Infrastructure Investor has a good set of recent compensation figures, excluding carry.
To summarize and round the numbers a bit, compensation ranges at dedicated infrastructure and energy PE firms are:
- Associates: $150K – $300K total compensation (50/50 base/bonus)
- Vice Presidents: $250K – $500K
- Directors: $400K – $900K
- Managing Directors: $750K – $1.8 million
If you also factored in carried interest, these numbers would increase modestly for Directors and MDs.
Expect lower compensation at pension funds, sovereign wealth funds, and insurance firms because they do not have carried interest at all.
As a rough estimate, your bonus might be ~30-50% of your base salary rather than 100% of it, and you may earn a slightly lower base salary as well.
The upside is that the lifestyle is also much better: you might work only ~40-50 hours per week at some of these funds.
You get busier when deals are heating up, but it’s still a vast improvement over the typical IB/PE hours.
The Recruiting Process: How to Get into Infrastructure Private Equity
Similar to real estate private equity, infrastructure private equity firms are also more forgiving about candidates’ backgrounds.
You could potentially get into the industry from many different backgrounds:
- Investment banking, ideally in groups like infrastructure, energy, renewables, or power & utilities that are directly related.
- Project finance since PF represents the debt side of infrastructure deals, and you need to understand both equity and debt to evaluate any deal.
- Real estate since some segments of infrastructure, such as schools and hospitals, overlap quite a bit; also, many companies structured as REITs own infrastructure assets.
- Other areas of private equity, such as firms that focus on renewables, energy, or power and utilities, since they’re all related to infrastructure.
- Infrastructure corporations/developers for obvious reasons (especially if you target greenfield-focused firms).
Some people also get in from areas like infrastructure/project finance law or infrastructure groups at Big 4 firms.
It’s unusual to break in without a few years of full-time experience in one of these fields; few firms hire undergrads or recent grads because they don’t have the resources to train them.
Most infrastructure PE firms use off-cycle processes to recruit (i.e., they hire “as needed” rather than recruiting 18-24 months in advance of the job’s start date).
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.
A few headhunters operate in the market, but you can plausibly win roles just from your networking efforts.
One Search is the one recruiting firm dedicated to “real assets” (infrastructure, energy, and real estate), and they’re the best source for positions at infra PE firms – if you decide to go through recruiters.
The Infrastructure Private Equity Interview Process
You’ll go through the usual set of in-person and phone or video-based interviews, and you should expect behavioral questions, technical questions, and a case study or modeling test.
The behavioral/fit questions are all standard: walk me through your resume, describe your past deals, tell me your strengths and weaknesses, and so on.
The technical questions tend to focus on the merits of different infrastructure assets, the KPIs and drivers, and how you evaluate deals and use the right amount of leverage.
And the case studies and modeling tests are much simpler than on-the-job models because you usually have only 1-3 hours to complete them.
If you’re already familiar with Excel, LBO modeling, and/or real estate financial modeling, these tests should not be that difficult.
You do need to learn some new terminology, but projecting the cash flows and debt service and calculating the IRR are the same as always.
Infrastructure Private Equity Interview Questions And Answers
Here are a few examples of sector-specific interview questions:
Q: Why infrastructure investing?
A: You like working on deals involving long-term assets that provide an essential service and also do some social good.
Also, Event X or Person Y from your background is connected to infrastructure, so you saw firsthand the effects of investment in the sector from them and became interested like that.
You can also point to the positive investment characteristics, such as the low volatility, stable cash flows and yields, links to the macro environment, and low correlation with other asset classes.
Q: What are the key drivers and key performance indicators (KPIs) for different types of infrastructure assets?
A: This is a broad question because each asset is different, but to give a few examples:
- Power Plants: Capacity (maximum output), production (electricity produced, which is a fraction of the total capacity), contracted rates for both of those, fixed and variable operating expenses, annual escalations for the revenue rates and expenses, and required maintenance or growth CapEx.
- Airports: Total passenger volume and average fees per passenger, fees from rent and fuel, operating expenses such as payroll, insurance, maintenance, and utilities, required CapEx, and assumed inflation rates for all of these.
- Toll Roads: Traffic levels and growth rates, the toll rate per vehicle per day, fixed expenses for operations and maintenance and variable expenses linked to per-car figures, required CapEx, and inflation rates for all of these.
Q: Walk me through a typical greenfield deal/model.
A: You assume a certain amount of construction costs and a timeline for the initial development, and you draw on equity and debt over time to fund it, putting in the equity first to satisfy lenders. Interest on the debt is capitalized during the construction period.
When construction is finished, the construction loan may be refinanced and replaced with a permanent loan as the asset starts operating and eventually stabilizes.
Then, you forecast the revenue, expenses, and cash flow in different scenarios and size the debt such that it complies with requirements, such as a minimum Debt Service Coverage Ratio (DSCR).
At the end of the holding period, you assume an exit based on a percentage of the asset’s initial value or a multiple of EBITDA or cash flow.
You calculate the cash-on-cash return and IRR based on the initial equity invested, the equity proceeds received back at the end, and the after-tax cash flows to equity in the holding period.
Q: Walk me through a typical brownfield deal/model.
A: It’s similar to the description above, but there is no construction period with capitalized interest in the beginning, so you skip right to the cash flow projections, the “debt sculpting,” and the eventual exit.
Q: 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?
A: Regulated utilities for water and electricity have lower risk, lower potential returns, and a higher percentage of total returns coming from the cash yields.
That’s because local governments set the allowed rates, and demand doesn’t fluctuate much unless the local population grows or shrinks significantly.
On the other hand, there’s also little downside risk because people can’t stop drinking water or using electricity even if there’s an economic crisis.
Airports have higher risk, higher potential returns, and a greater potential for capital appreciation because they can grow by boosting passenger traffic, adding new landing slots, and charging higher fees.
But there’s also more risk because passenger traffic could plummet in an economic recession, a war, or a pandemic.
With telecom assets like cell phone towers, the risk and potential returns are even higher, with much of the returns expected to come from capital appreciation.
There are different lease types (ground leases and rooftop leases), and location is even more critical than with other infrastructure, so these assets are closer to real estate in some ways.
Q: How would you value a toll road or an airport?
A: You almost always use a DCF model for these assets because cash flows are fairly predictable.
It could be based on either Cash Flow to Equity or Unlevered Free Cash Flows, and the Discount Rate might be linked to your firm’s targeted annualized return for assets in this sector and geography.
If the Discount Rate is the Cost of Equity, then it’s linked to the targeted equity returns; for WACC, the Cost of Debt is linked to the weighted average interest rate on the debt used in the deal.
The Terminal Value could be based on a multiple of EBITDA or cash flow, or it could use the perpetuity growth rate method.
Q: Why can you use high leverage in many infrastructure deals? And what are some of the important credit stats and ratios?
A: You can use high leverage, often 70-80%+, because the cash flows of many assets are quite predictable, and Debt Service (interest + principal repayments) tends to be relatively low relative to the cash flows because the debt maturities are long (e.g., 10-15+ years).
Some of the most important ratios include the Debt Service Coverage Ratio (DSCR) and the Loan Life Coverage Ratio (LLCR), along with standard ones like the Leverage and Coverage Ratios used in debt vs. equity analysis.
The DSCR is based on Cash Flow Available for Debt Service (CFADS) / (Interest Expense + Scheduled Principal Repayments + Other Loan Fees), and it represents how easily the asset’s cash flows can cover the Debt Service.
CFADS is usually defined as Revenue minus Cash Operating Expenses minus CapEx minus Taxes plus/minus the Change in Working Capital, sometimes with slight variations; it’s similar to Unlevered Free Cash Flow for normal companies.
Importantly, depreciation must be excluded, except for its tax impact, because it’s non-cash.
The LLCR is defined as the Present Value of the total Cash Flow Available for Debt Service over the loan’s life divided by the current Debt balance.
The Discount Rate should be based on the weighted average interest rate on the Debt.
Higher numbers are better because it means the asset’s cumulative cash flows can more easily pay for the debt.
Q: What is “debt sculpting” in infrastructure deals, and why is it so common?
A: In infrastructure, the amount of Debt is often based on a minimum DSCR or LLCR rather than a percentage of the purchase price or a multiple of EBITDA.
Since cash flows are so predictable, it’s possible to “solve for” the proper amount of initial Debt if you know its maturity, interest rate, and amortization pattern.
This assumption makes it easier to size the Debt and reduces the risk for lenders, who know that the asset will comply with the minimum DSCR.
Infrastructure Case Study Example
Real-life infrastructure models can be complex, but time-pressured case studies are a different story.
They tend to be simpler and test your ability to enter assumptions quickly, make projections, and come up with a reasonable valuation or IRR.
Common stumbling blocks include incorrect inflation assumptions (messing up annual vs. quarterly vs. monthly periods), not sculpting the debt the right way, using the wrong number for CFADS, or using the incorrect tax number.
Here’s a simple example of a valuation case study (no solutions, sorry):
“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.”
Infrastructure Private Equity Exit Opportunities
The most common entry points into infrastructure PE are also the most common exit opportunities: investment banking, project finance, real estate, other areas of PE, infrastructure corporates/developers, and Big 4 infrastructure groups.
It tends to be difficult to move into generalist roles coming from infrastructure because the perception is that it’s very specialized.
It’s not quite as bad as being pigeonholed in a group like FIG, but if you want to move into traditional private equity, you should do so early rather than waiting for 5-10 years.
Venture capital is not a likely exit opportunity because infrastructure assets are the opposite of early-stage startups: stable, with highly predictable cash flows and growth profiles.
Resources for Learning More About Infrastructure Private Equity
I cannot comment directly on books or courses because I have not completed any myself, but I’ve heard that Ed Bodmer’s tutorials are good.
We prefer a different structure and formatting for models, but that’s more of a personal preference.
Preqin issues good infrastructure reports once per year, which you can Google, and this guide from JP Morgan also has a concise sector overview.
Infrastructure Private Equity: Pros and Cons
Summing up everything above, here’s how you can think about the industry:
- High salaries and bonuses, at least if you work at a dedicated PE firm rather than a pension, SWF, or insurance company.
- You get to work on deals that do some social good, at least in certain sectors, and that provide benefits to individuals, such as diversification, inflation hedging, and strong cash yields.
- Each asset requires different assumptions and drivers, so you’re always learning new skills (compared with vanilla IB/PE, where deals start to look the same after a while).
- The hours and lifestyle are better if you’re at a pension, SWF, or insurance company – but total compensation is also below standard PE pay.
- It’s more feasible to get into the industry without working at a top BB or EB bank for two years; they care more about your skills and sector experience than your pedigree.
- It is a small industry if you go by the number of dedicated, independent PE firms, so it can be tricky to find openings and advance.
- It is also specialized, though arguably less so than something like FIG; that said, you can still get pigeonholed if you stay too long and then decide you don’t like it.
- Compensation is lower at the non-PE firms, and even at the dedicated PE firms, the MD/Partner-level compensation has a lower ceiling.
- You’re further removed from real life than you might expect because finance professionals cannot “evaluate” a power plant or water treatment facility in the same way they could inspect an apartment building; you rely on outside specialists for much of this process.
- Although each deal is different, some of the modeling work can become repetitive because you have to look at so many individual contracts and build very granular assumptions.
Overall, infrastructure private equity is a great career option, but it’s a bit less of a “side door” or “back door” than real estate private equity because you do need some relevant deal experience first.
The best part is probably the optionality – if you want higher pay and longer hours, you have options, and if you want a better lifestyle with lower pay, you can also do that.
And with the dismal state of infrastructure in most countries, it’s safe to say that there will always be demand for investment – even if it takes a few broken bridges and toll roads to get there.
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