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Private Equity Shifting Money to Public Works

Billions of Dollars Are Being Committed to Transportation, Energy and Social Infrastructures

Private equity funds that were heavy into commercial real estate investing and helped drive prices to global highs have found new channels in which to sink their money. One such channel gaining quite a bit of currency among well heeled investors is infrastructure.

And as the cost to maintain, upgrade and develop U.S. infrastructure continues to mount, government bodies increasingly are reaching out to these investors to attract funding.

Last week, Australian investment and specialized funds and asset manager Babcock & Brown raised an additional $230 million of committed capital focused primarily on infrastructure investment opportunities in North American markets. This increases Babcock & Brown's total amount raised for acquiring North American infrastructure to more $1 billion.

Washington, D.C.-based global private equity firm The Carlyle Group recently entered the market, raising more than $1 billion in equity commitments this fall for its first infrastructure fund, Carlyle Infrastructure Partners (CIP).

Spain-based Global Via Infraestructuras S.A. (GVI), a global leader of major urban highway projects, opened an office in Miami last week and hopes to grow its presence in South Florida and throughout the United States. It is being backed by Caja Madrid, a 300-year-old Spanish savings bank that has a history of investing in public works projects as part of regional economic development.

And in October, Kohlberg Kravis Roberts & Co. (KKR), Texas Pacific Group (TPG) and Goldman Sachs teamed up to acquire TXU Corp., a Texas utility firm.

Babcock & Brown

Babcock & Brown has been operating in the North American infrastructure sector for 30 years, initially as an advisor and provider of financial services and since 1996, investing as a principal in the sector.

Babcock & Brown currently has a team of 128 people working in eight North American markets focused on origination and asset and investment management. This team is part of Babcock & Brown's global infrastructure team, which now exceeds 420 people worldwide.

Currently, its infrastructure investments in North America make up just 6% of its overall infrastructure investment portfolio; 55% is in Asia and 39% in Europe. Its portfolio is equally weighted in energy transmission and distribution and thermal power generation at 27% each. The firm is 17% invested in ports, 15% in public private partnerships, 10% in wind power and 5% in rail transportation.

In North America, Babcock & Brown is currently focusing on renewable energy projects, transmission and distribution conduits, toll roads, bridges/tunnels, marine ports, airports, parking and rail facilities, military and student housing, schools, hospitals and prisons. It is looking right now at opportunities in Miami and Oakland, CA.

Carlyle Infrastructure Partners

CIP has 14 investment professionals in New York and Washington, D.C., and intends to invest primarily in projects generally ranging from $100 million to more than $1 billion in enterprise value.

CIP will invest in transportation and water and wastewater facilities, including roads, bridges, tunnels, airport facilities, maritime ports, transit projects and other public benefit infrastructure.

"U.S. public infrastructure requires $1 trillion in funding over the next five years," said Robert W. Dove, co-head of the fund and former executive vice president at Bechtel Enterprises. "The private sector has a role to play, as seen in Europe, and can be a proven means of helping to satisfy such dramatic funding needs."

Global Via Infraestructuras

GVI specializes in the investment and management of infrastructure concessions, such as toll roads. Among the top five largest concession developers in the world, GVI currently manages 37 concessions, 20 of which are toll roads.

The company's unique approach to infrastructure development, which is common in Europe, Australia and other major countries, is focused on creating needed infrastructure while enhancing regional economic development, including congestion relief. Under its approach, the local governments retain ownership of the highways but the concessionaires shoulders more of the financial risks.

Under these arrangements, concessionaires do not control or collect the tolls, which remain within the control of the state or local government.

Project developers are compensated based on what are known as "availability payments," which are earned only if strict contractual performance measures, such as quality construction, operation and management, are met.

Concessionaires make their money on the long-term return on investment and the contractor on short-term construction margin.

Among the U.S. firms partnering with GVI is Infrastructure Corporation of America (ICA), a Tennessee-based asset maintenance management firm that currently manages about 2,000 lane miles of Interstate and state roads for the Florida Department of Transportation and handles total maintenance and upkeep of 70% of Florida's rest areas and welcome stations.

TXU Corp.

Kohlberg Kravis Roberts & Co. (KKR), Texas Pacific Group (TPG) and Goldman Sachs completed merger agreement with TXU, which subsequently changed its name to Energy Future Holdings Corp.

Completion of the merger agreement marked the final step in its transformation into a privately held company with three separate and distinct business units with separate boards, management teams, and headquarters. Each business will operate independently under the leadership of a CEO.

Jim Burke will serve as CEO of TXU Energy, a competitive electricity retailer. Mike Greene will serve as CEO of Luminant, a competitive power generation business, including mining, wholesale marketing and trading, and construction. Bob Shapard will serve as CEO of Oncor, a regulated electric distribution and transmission business.

Public Investment Outlook

According to a new Reason Foundation report by Robert Poole, director of transportation studies, who has advised the last four presidential administrations on transportation and policy issues, such private financings of public deals are a growing phenomenon.

"These deals have a proven track record in Europe and Australia," Poole said. "They've shown they can mobilize more capital and shift significant financial risks away from taxpayers on onto private investors."

Other potential private investors also include other heavies in commercial real estate such as pension funds and insurance companies, Poole said.

And there is much to invest in report Bernard L. Schwartz and Sherle R. Schwenninger of think tank New America Foundation.

From 1950 to 1970, the U.S. spent more than 3% of its GDP on public infrastructure. Since 1980, it has spent less than 2%.

"As a result, we are beginning to experience the effects of a backlog of public investment needs," the two report. "Not surprisingly, infrastructure bottlenecks -- traffic-choked roads, clogged-up ports, an antiquated air transportation system -- are undercutting our nation's efficiency and costing our economy billions in lost income and economic growth."