Infrastructure Leading the Way?

May 19, 2008

The proposed $12.8 billion takeover of the Pennsylvania Turnpike that Citi put on the table is being billed by the state’s governor as a “slam dunk.” Citi Infrastructure Investors, joined by advisory group Babcock & Brown and Spanish transport and communications firm Albertis Infrastructure, beat out rival bidding groups led by Goldman Sachs and Macquarie to win rights to the highway.

The deal must pass state legislative approval before Citi can take the reins of the lease, but the plan is for the state to raise $150 million annually through the deal.

This deal is huge, but probably just one of many infrastructure deals we will be seeing from the large market private equity players as investing in the infrastructure sector is very en vogue these days. There is need for infrastructure repair in the U.S. (a study from the Urban Land Institute and Ernst & Young estimates that the U.S. will experience a $170 billion shortfall for infrastructure needs) as well a need for new infrastructure abroad. Additionally, infrastructure investments tend to be more recession proof than many other sectors.

It’s been reported that Citigroup is raising up to $3 billion for infrastructure investments, while KKR will also be pursuing infrastructure investments as will The Blackstone Group. The Carlyle Group and Goldman Sachs have already launched dedicated infrastructure arms.

There’s no doubt that infrastructure deals make for a good investment. So while it’s clear that all the big players are going to be involved in the sector, where are the middle market private equity players in all this? I am certain that some of these deals are getting done, but they seem few and far between. The most recent middle market infrastructure deal comes from J.H. Whitney & Co., which acquired FNF Construction, Inc., the largest road and bridge builder in Arizona and one of the leading heavy-highway infrastructure contracting firms in the Southwest United States.

“We believe that road and bridge maintenance and construction in the U.S., particularly in those demographically expanding areas such as the Southwest, is dramatically under-invested and poised for long-term growth,” said Ransom Langford, a managing director, J.H. Whitney & Co.

I am sure there's room for even more middle market investments or that there's more infrastructure activity going on in the middle market than I am currently hearing about. If you're a mid-market firm doing deals or looking for deals in this space, we'd love to know about it.