Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

In the 20 days President Donald Trump has been in office, he's said surprisingly little about infrastructure.

Yet the lack of detail surrounding potential government spending hasn't prevented alternative asset managers including Carlyle Group LP and Blackstone Group LP from turning their attention there. 

On a fourth-quarter earnings call Wednesday, Carlyle's co-CEO and co-founder David Rubenstein said he was "very bullish" and believed in the firm's ability to become a major player in infrastructure -- an area that has garnered more interest from investors than he had expected.  And Blackstone's global head of private equity Joe Baratta last week told Bloomberg Television that the firm could target as much as $40 billion for infrastructure deals alone.

Stacked Bricks
Investment firms both compete against and manage capital for pension and sovereign wealth funds, which like infrastructure for its low correlation to other assets (such as equities)
Source: Preqin
*Investor sentiment is still positive, although less so than in previous years, likely due to concerns regarding valuations and the ability of fund managers to put dry powder to work

Trump has promised a $1 trillion spending package to repair and expand U.S. roads, airports and bridges over the next decade, with funding to come in part from government financing, the private sector or a hybrid of both (public-private partnerships). It was a key part of his campaign so it's understandable that people are ready to bet on a building boom, even if the details aren't yet ironed out. But just because investors are falling over themselves to hand checks to these firms doesn't mean they should accept everything that comes their way -- at least initially.

As I've written, infrastructure investors haven't had the easiest time putting money to work in North America, partly because of stiff rivalry from Canadian pension funds as well as a general scarcity of deals.

Almost half of the $137 billion in global dry powder that had been raised for infrastructure investments as of Dec. 31 is designated for North American investments.  Additionally, firms including Carlyle are currently tapping the market for a collective $45 billion dedicated to the region, according to data from Preqin (and that's totally separate from the $40 billion figure Baratta said Blackstone may target). 

Despite being a catalyst for change, Trump's federal policies can't be forced upon state governments, which have broadly been unwilling to privatize existing assets such as airports or toll roads, especially when financing is available in the public debt market. Even if that changes, firms pushing to become bigger players in infrastructure -- such as Blackstone and Carlyle -- will have to contend with incumbents like Global Infrastructure Partners and Macquarie Infrastructure and Real Assets to fend for what are currently slim pickings. 

Meet the Competition
Blackstone wants to re-enter infrastructure investing, an area that's already well picked over by rivals such as the below firms but also pension and sovereign wealth funds
Source: Preqin

If funds raised aren't able to be invested in a certain amount of time, firms would likely have to return the money to their investors and forfeit management and performance fees. For Carlyle in particular, which is attempting to raise $100 billion between 2016 to 2019, the optics of having to give back even a slice of this would be unfortunate. 

Ambition needn't be unreasonably neutered. But there are alternatives to simply accepting billions of dollars for funds that may sit sidelined for years. For one, a portion of funds raised could be contingent on Trump's policies. Or if firms want to be extra prudent, they'll raise smaller amounts in the early stages (which would allow investors to participate directly in sizable deals should they arise) before raising larger follow-up funds once the strategy proves itself out. 

Carlyle itself said Wednesday that there was "no doubt" it has stumbled in the past -- witness its hedge fund losses in the latest quarter. The firm and its peers should act now to ensure that their infrastructure push is built on a strong foundation.  

Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Carlyle is said to be targeting $2.5 billion for a global infrastructure fund

  2. Carlyle said Wednesday it wanted to focus on existing assets rather than new projects.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net